Question 1

A Congressional representative who calls for a decrease in tax rates in order to increase saving, work effort, and economic growth would most likely be advocating:

Accepted Answer

A supply-side fiscal policy focuses on increasing the supply of goods and services in an economy by providing tax incentives for businesses and individuals to encourage savings, investments, and work effort. By decreasing tax rates, individuals have more disposable income, which can be used for savings or investment, and businesses have more retained earnings available for expansion or improvement. This policy approach assumes that by increasing the supply of goods and services, economic growth will follow.

Question 2

Supply-side economists contend that the system of taxation in the United States:

Accepted Answer

Supply-side economists argue that high taxes create disincentives to work, save, and invest, as they reduce the after-tax return on these activities.

Question 3

Based on the Phillips Curve, when the actual rate of inflation is greater than the expected rate, the unemployment rate will:

Accepted Answer

When actual inflation exceeds expected inflation, unemployment temporarily falls as firms hire more due to higher-than-expected profits, leading to increased nominal wages until expectations adjust.

Question 4

If the expected rate of inflation rises, then the short-run Phillips Curve would:

Accepted Answer

An increase in the expected rate of inflation would cause workers to demand higher wages, leading to an increase in the nominal wage rate. This increase in nominal wage rate would shift the short-run Phillips Curve to the right.

Question 5

The short-run Phillips Curve intersects the long-run Phillips Curve at the:

Accepted Answer

The short-run Phillips Curve shows the relationship between unemployment and inflation in the short-run, while the long-run Phillips Curve shows the relationship between unemployment and inflation in the long-run when wages and prices have fully adjusted. The intersection of the two curves represents the natural rate of unemployment, at which there is no trade-off between inflation and unemployment in the long-run. Therefore, the best choice is D, natural rate of unemployment.

Question 6

When the rate of inflation is decreasing, this economic condition is called:

Accepted Answer

Disinflation refers to a decrease in the rate of inflation, meaning that prices of goods and services are still increasing, but at a slower rate than before. Depreciation refers to a decrease in the value of a currency, stagflation refers to a period of high inflation and stagnant economic growth, and deflation refers to a decrease in prices of goods and services.

Question 7

In an aggregate demand-aggregate supply framework, fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, save, and invest would be characterized primarily as a:

Accepted Answer

Cutting taxes to improve incentives to work, save, and invest is likely to increase the productive capacity of the economy, leading to a rightward shift of the long-run aggregate supply curve.

Question 8

Refer to the table above. Calculating the annual inflation rates would indicate that this economy is experiencing:

Accepted Answer

The inflation rates are decreasing over time, indicating a slowing down of the rate of inflation. This is known as disinflation.

Question 9

Supply-side policies can be described in terms of the aggregate demand and aggregate supply model as an attempt to shift:

Accepted Answer

Supply-side policies aim to increase the productive capacity of an economy, thus shifting the aggregate supply curve to the right. This is typically achieved through measures such as tax cuts, reducing regulations, and promoting investment in infrastructure or education. Shifting the aggregate supply curve to the right can lead to lower prices and higher output, which can ultimately benefit the economy. However, supply-side policies do not directly affect aggregate demand, so option A, C, and D are incorrect.

Question 10

Refer to the table above. What would be the annual inflation rates in Years 2, 3, and 4, respectively?

Accepted Answer

The answer of  Refer to the table above. What...

Question 11

The long-run Phillips Curve is vertical at:

Accepted Answer

The long-run Phillips Curve shows the relationship between inflation and the unemployment rate in the long run. In the long run, changes in the inflation rate are primarily driven by changes in the money supply, so the long-run Phillips Curve is vertical. The natural rate of unemployment is the rate at which there is neither upward nor downward pressure on the inflation rate. This means that the long-run Phillips Curve is vertical at the natural rate of unemployment. Therefore, the correct answer is B, the natural rate of unemployment.

Question 12

Disinflation can be explained by the Phillips Curve analysis as resulting from a situation where the actual rate of inflation is initially less than the expected rate, causing the unemployment rate to:

Accepted Answer

Disinflation occurs when inflation rates decrease. According to the Phillips Curve, if actual inflation is less than expected, unemployment may rise temporarily. Lower inflation can lead to lower nominal wage growth, eventually aligning actual and expected inflation rates.

Question 13

Which action will tend to decrease aggregate supply according to supply-side economists?

Accepted Answer

According to supply-side economists, an increase in marginal tax rates reduces the incentives for work, saving, and investment, thereby reducing aggregate supply. This is because high marginal tax rates decrease the after-tax income and reduce the rewards of engaging in productive activities.

Question 14

The automatic adjustment mechanism that makes the economy move towards the long-run Phillips Curve is:

Accepted Answer

The automatic adjustment mechanism that makes the economy move towards the long-run Phillips Curve is inflation expectations and wage adjustments. This means that as expectations of inflation increase, workers will demand higher wages, leading to an increase in the prices of goods and services. This process continues until prices stabilize and wages adjust to the new level of inflation, resulting in a movement along the Phillips Curve towards the natural rate of unemployment. This mechanism occurs without the need for any policy intervention, making it an automatic adjustment mechanism.

Question 15

Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent. Should inflation actually be 6 percent, then:

Accepted Answer

The real wage is the nominal wage adjusted for inflation. If inflation is higher than expected, the real wage falls. Here, the nominal wage increases by 5%, but inflation is 6%, so the real wage effectively falls by 1%.

Question 16

Which is a basic proposition of supply-side economics?

Accepted Answer

Supply-side economics advocates for reduced taxes on businesses as a way to encourage investment and increase aggregate supply, which in turn can boost the economy. This is based on the idea that taxes reduce incentives to invest and produce more goods and services, which ultimately slows down economic growth.

Question 17

The analysis of the short-run and long-run Phillips Curve suggests that an increase in aggregate demand:

Accepted Answer

In the short run, an increase in aggregate demand shifts the short-run Phillips Curve upward, leading to higher prices and output. However, in the long run, prices adjust fully, and the economy returns to its natural rate of unemployment. Therefore, in the long run, an increase in aggregate demand only affects the price level, not real output or employment.

Question 18

The short-run Phillips Curve assumes an unchanging:

Accepted Answer

The short-run Phillips Curve assumes an unchanging expected rate of inflation, meaning that people's expectations about inflation do not adjust immediately to changes in actual inflation.

Question 19

Assume that a person saves $50,000 and earns 7 percent annual interest. If the marginal tax rate is 36 percent, then the after-tax interest earning will be:

Accepted Answer

First, we need to calculate the before-tax interest earning: 
$50,000 x 0.07 = $3,500
Then, we need to calculate the tax amount: 
$3,500 x 0.36 = $1,260
Finally, we subtract the tax amount from the before-tax interest earning to get the after-tax interest earning: 
$3,500 - $1,260 = $2,240. 
Therefore, the best choice is B.

Question 20

In the short run, if the actual rate of inflation is lower than the expected rate, then:

Accepted Answer

When the actual rate of inflation is lower than expected, real wages are higher than anticipated, leading to increased labor costs for firms. This results in lower profits and potentially higher unemployment as firms may reduce their workforce to cut costs.

Quiz 18: Extending the Analysis of Aggregate Supply