Question 1

Supporters of supply side theory will point to the end of the 1982 recession as proof of the success of the tax cuts of the 1980s in stimulating the economy. However, critics argue that there is an alternative explanation for the end of the 1982 recession. Explain their reasoning.

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Question 2

Draw the Laffer Curve and explain its shape.

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Question 3

What is the basic principle behind supply-side economics? After supply-side policies were implemented in 1981, the economy pulled out of the 1980 recession and entered an expansionary period. How would a supply-side economist explain the success of these policies? How do critics of supply-side policies explain the recovery from the recession?

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Question 4

Critics of supply-side theory say that cuts in tax rates may not necessarily raise tax revenue. What is their argument?

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Question 5

Economists will reason that any true test of the rational-expectations model is really a joint test of two things. Identify and discuss what these two tests are. What might we conclude if the test rejects the hypothesis?

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Question 6

What did supply-side economics argue was the real problem with the U.S. economy and what was its prescription?

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Question 7

Explain what would happen to tax revenue if policy makers cut tax rates while existing rates are above the bend in the Laffer Curve. Why does this happen?

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Question 8

Use the Economics in Practice titled "How are Expectations Formed?" to answer the following question. What are the two factors that the British economists discovered are important in how consumers form inflationary expectations? What does this suggest vis-à-vis concerning what economics theorists believe to be true about how consumers form their expectations?

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Quiz 18: Alternative Views in Macroeconomics