Question 1

-In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point
A) A, that is, the price level and level of real GDP will not change.
B) B.
C) C.
D) D.

Accepted Answer

When workers and firms correctly anticipate an increase in aggregate demand and the resulting inflation, they adjust their expectations and actions accordingly. This means that nominal wages and prices adjust to the anticipated inflation, allowing the economy to move to a new equilibrium at a higher price level without changing the level of real GDP. This is represented by a vertical long-run aggregate supply curve, indicating that the economy moves to a point like C, where the price level is higher but real GDP remains at its potential level.

Question 2

-In the above figure, the economy is at point A. An increase in money wage rates that sets off a cost- push inflation will initially move the economy from point A to point
A) A, that is, the economy does not change.
B) B.
C) C.
D) D.

Accepted Answer

An increase in money wage rates leading to cost-push inflation typically results in higher production costs for businesses. This can reduce aggregate supply, shifting the economy from a point of equilibrium (A) to a point where output is lower and the price level is higher, represented by point D in a typical aggregate demand and aggregate supply model.

Question 3

Rational expectations are
A) used in the labor market but not in the financial markets.
B) possible to make and are always accurate.
C) based on all relevant information.
D) impossible to make because they are assumed to be always accurate.

Accepted Answer

Rational expectations are based on all relevant information and expectations are formed to be as accurate as possible given that information. However, it does not mean they are always accurate, as people can make mistakes or unexpected events can occur.

Question 4

During which decade did the United States suffer from the worst cost- push inflation?
A) 1960s
B) 1970s
C) 1990s
D) 1980s

Accepted Answer

The 1970s were known as a decade of high inflation in the United States, with cost-push inflation caused by rising energy prices and agricultural prices. The 1970s also saw high levels of government spending and deficits, which contributed to inflationary pressures.

Question 5

A rational expectation is
A) a forecast which perfectly foretells the future.
B) a forecast devoid of all emotions.
C) the best possible forecast based upon all relevant information.
D) the forecast that automatically carries over from past forecasts.

Accepted Answer

A rational expectation is the best possible forecast based upon all relevant information. It takes into account all available information and uses it to make the most accurate forecast possible. It is not necessarily a perfect or emotionless forecast, but rather one that is based on rational analysis and evaluation of all available data.

Question 6

Suppose aggregate demand increases by less than expected. Which of the following describes what will occur?
A) Real GDP will be more than potential GDP.
B) Real GDP will be less than potential GDP.
C) The price level will fall.
D) Both answers A and B are correct.

Accepted Answer

If aggregate demand increases by less than expected, it means that there is not enough demand to meet the potential output of the economy. As a result, firms will cut back on production, leading to a decrease in real GDP. Potential GDP refers to the maximum output that an economy can produce without causing inflation, so if real GDP falls below this level, it indicates that the economy is underutilizing its resources. The price level may or may not fall depending on the specific circumstances, but it is not directly related to the decrease in aggregate demand. Therefore, answer B is the most accurate.

Question 7

When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,
A) there will be no unemployment.
B) workers will underestimate the real wage rate.
C) unemployment will be at the natural rate.
D) workers will overestimate the real wage rate.

Accepted Answer

When workers and employers correctly anticipate inflation, they adjust their expectations and wage demands accordingly, leading to unemployment remaining at the natural rate.

Question 8

-An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD₁, the inflation rate is ) A) 20 percent a year B) 10 percent a year C) 0 percent a year D) More than 20 percent a year

Accepted Answer

When aggregate demand increases, the price level rises above 100. If the price level increases to 110, this represents a 10 percent increase, indicating a 10 percent inflation rate.

Question 9

-In the above figure, the economy is at point A. An increase in oil prices occurs after which the Fed responds by increasing the quantity of money. The economy moves from point A to
A) C to point B.
B) B to point C.
C) C to point D.
D) D to point C.

Accepted Answer

The answer of 
-In the above figure, the economy is...

Question 10

Suppose aggregate demand increases by more than expected. Which of the following describes what will occur?
A) The price level will increase.
B) Unemployment will fall.
C) Real GDP will be greater than potential GDP.
D) All of the above answers are correct.

Accepted Answer

An increase in aggregate demand will cause a shift to the right of the aggregate demand curve. This will lead to an increase in both the price level and real GDP. In the short run, firms may increase production to meet the higher demand, leading to a decrease in unemployment. However, if the economy operates above potential GDP for an extended period, it could lead to inflation and long-run economic instability.

Question 11

-An economy is in long- run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD₁. If the increase in aggregate demand is expected, then the inflation rate is . A) More than 20 percent a year B) 0 percent a year C) 10 percent a year D) 20 percent a year

Accepted Answer

The answer of 
-An economy is in long- run equilibrium...

Question 12

If people correctly expect an increase in aggregate demand, their money wage rate immediately, the SAS curve shifts .
A) rises; leftward
B) rises; rightward
C) fall; leftward
D) falls; rightward

Accepted Answer

If people expect an increase in aggregate demand, they anticipate higher prices and demand higher wages, causing the short-run aggregate supply (SAS) curve to shift leftward due to increased production costs.

Question 13

If people correctly anticipate an increase in aggregate demand, a result is
A) there are no predictable results associated with an anticipated increase in aggregate demand.
B) an increase in the real value of outstanding government debt.
C) a lower rate of inflation in the current time period.
D) workers demanding higher money wages to keep the real wage unchanged.

Accepted Answer

If people correctly anticipate an increase in aggregate demand, workers may demand higher money wages to keep the real wage unchanged. This is because as demand for goods and services increases, employers may need to hire more workers or existing workers may work more hours, leading to a tighter labor market and increasing bargaining power for workers to demand higher wages.

Question 14

If people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then, assuming the economy is initially at potential GDP,
A) only the price level rises with no change in real GDP.
B) only real GDP increases with no change in the price level.
C) neither the price level nor real GDP increase.
D) both the price level and real GDP increase.

Accepted Answer

When people anticipate inflation correctly and wages adjust immediately, the nominal wage increases offset the inflation, keeping real wages constant. This means that the real GDP remains at potential GDP, and only the price level rises.

Question 15

The anticipated inflation rate is 5 percent. In order for purchasing power to remain constant, the money wage rate must rise by
A) 7 percent.
B) 5 percent.
C) 12 percent.
D) 2 percent.

Accepted Answer

To maintain purchasing power, the money wage rate must rise by the same rate as inflation, which is 5 percent.

Question 16

Oil prices were pushed much higher twice during the 1970s. The Fed responded by allowing the quantity of money to grow rapidly
A) following the first oil price hike but not following the second oil price hike.
B) following the second oil price hike but not following the first oil price hike.
C) following neither oil price hike.
D) following the first oil price hike and also following the second oil price hike.

Accepted Answer

The answer of Oil prices were pushed much higher twice...

Question 17

If people correctly anticipate an increase in government expenditures on goods and services so that their money wage rate adjusts immediately, then, assuming the economy is initially at potential GDP,
A) real GDP and the price level will increase in the short run, but the real wage rate will fall.
B) real GDP remains at potential GDP, there is no change in the price level, and the real wage rate rises in the short run.
C) real GDP remains at potential GDP.
D) real GDP, the price level, and the real wage rate all increase in the short run.

Accepted Answer

If people correctly anticipate an increase in government expenditures on goods and services, their money wage rate will adjust immediately. However, as the economy is initially at potential GDP, there is no room for an increase in output beyond potential GDP. Therefore, the increase in government expenditures will not result in an increase in real GDP. Moreover, since the increase in government expenditures is not accompanied by an increase in supply, the price level will remain unchanged. Thus, real GDP remains at potential GDP without any change in the price level, which in turn means that there is no change in the real wage rate.

Question 18

Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, _ .
A) real GDP decreases below potential GDP
B) real GDP increases above potential GDP
C) real GDP remains at potential GDP
D) long- run aggregate supply decreases

Accepted Answer

When aggregate demand increases by more than anticipated, businesses will increase production to meet the higher demand, leading to an increase in real GDP above potential GDP. This usually results in higher prices and inflation in the short run. However, in the long run, wages and other input costs will adjust to the higher prices, causing the economy to return to its potential GDP level.

Question 19

As far as cost- push inflation goes, the United States
A) has never experienced this type of inflation.
B) experienced this type of inflation during the 1990s.
C) has experienced only this type of inflation.
D) experienced this type of inflation in the 1970s.

Accepted Answer

The United States experienced cost-push inflation in the 1970s, primarily as a result of rising energy costs and wage demands by labor unions. This type of inflation occurs when increased production costs, such as wages and raw materials, lead to higher prices for consumers.

Question 20

-In the above figure, if people correctly anticipate the increases in aggregate demand and the resulting inflation, the path will be from
A) point A to B to D to F to G.
B) point A to B to D to E to G.
C) point A to D to G.
D) point A to C to D to F to G.

Accepted Answer

If people correctly anticipate increases in aggregate demand and the resulting inflation, the economy will move directly from the initial equilibrium (point A) to the new long-run equilibrium (point G) without short-run deviations, as expectations adjust immediately.

Quiz 12: U.S. Inflation, Unemployment, and Business Cycle

-In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point

-In the above figure, the economy is at point A. An increase in money wage rates that sets off a cost- push inflation will initially move the economy from point A to point

Rational expectations are

During which decade did the United States suffer from the worst cost- push inflation?

A rational expectation is

Suppose aggregate demand increases by less than expected. Which of the following describes what will occur?

When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,

-An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD1, the inflation rate is )

-In the above figure, the economy is at point A. An increase in oil prices occurs after which the Fed responds by increasing the quantity of money. The economy moves from point A to

Suppose aggregate demand increases by more than expected. Which of the following describes what will occur?

-An economy is in long- run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD1. If the increase in aggregate demand is expected, then the inflation rate is .

If people correctly expect an increase in aggregate demand, their money wage rate immediately, the SAS curve shifts .

If people correctly anticipate an increase in aggregate demand, a result is

If people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then, assuming the economy is initially at potential GDP,

The anticipated inflation rate is 5 percent. In order for purchasing power to remain constant, the money wage rate must rise by

Oil prices were pushed much higher twice during the 1970s. The Fed responded by allowing the quantity of money to grow rapidly

If people correctly anticipate an increase in government expenditures on goods and services so that their money wage rate adjusts immediately, then, assuming the economy is initially at potential GDP,

Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, _ .

As far as cost- push inflation goes, the United States

-In the above figure, if people correctly anticipate the increases in aggregate demand and the resulting inflation, the path will be from

-An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD₁, the inflation rate is )

-An economy is in long- run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD₁. If the increase in aggregate demand is expected, then the inflation rate is .