Question 1

If the government adopts a hands-off policy toward inflation, then the long run effects of cost-push inflation and demand-pull inflation are identical.

Accepted Answer

In the long run, cost-push inflation can lead to stagflation (high inflation and unemployment), while demand-pull inflation can result in sustained economic growth if managed properly.

Question 2

The implication of the long-run Phillips Curve is that there is no trade-off between inflation and unemployment in the long-run.

Accepted Answer

The long-run Phillips Curve is vertical, indicating that in the long run, inflation does not affect the natural rate of unemployment, meaning there is no trade-off between inflation and unemployment.

Question 3

The experience of the United States with supply-side policies is that tax cuts affect the economy more on the demand side rather than the supply side.

Accepted Answer

Studies have shown that while tax cuts may stimulate economic growth to some degree, the majority of the effects are on the demand side, as consumers have more disposable income to spend. The idea that tax cuts will lead to increased investment and production on the supply side has not been supported by empirical evidence in the US.

Question 4

The adjustment mechanism that brings the economy to its long-run aggregate supply has to do with inflation expectations, whereas the adjustment to the long-run Phillips curve has to do with wage flexibility.

Accepted Answer

The answer of The adjustment mechanism that brings the economy...

Question 5

The policy implication of the long-run Phillips Curve is that, while stimulative policies may work to reduce unemployment in the short run, the only effect of such policies in the long run is to raise inflation.

Accepted Answer

The long-run Phillips Curve is vertical, indicating that there is no trade-off between inflation and unemployment in the long run. Stimulative policies may temporarily reduce unemployment, but eventually, they only lead to higher inflation without affecting the natural rate of unemployment.

Question 6

According to the simple extended AD-AS model, if the economy is in a recession, prices and nominal wages will eventually fall and the short-run aggregate supply curve will increase, so that real output returns to its full-employment level in the long run.

Accepted Answer

According to the simple extended AD-AS model, during a recession, prices and nominal wages will eventually fall, shifting the short-run aggregate supply curve to the right. This will result in an increase in real output, eventually returning the economy to its full-employment level in the long run.

Question 7

Supply-side economists recommend higher marginal tax rates to increase aggregate supply and real output.

Accepted Answer

Supply-side economists argue for lower marginal tax rates to incentivize production and economic growth.

Question 8

Supply-side economists contend that aggregate supply is the relevant policy factor in influencing the price level and real output in an economy.

Accepted Answer

Supply-side economists focus on how changes in aggregate supply, such as tax cuts and deregulation, can influence economic growth, price levels, and real output.

Question 9

The Laffer Curve indicates that lower tax rates will increase output.

Accepted Answer

The answer of The Laffer Curve indicates that lower tax...

Question 10

If wages and other input prices are inflexible, then the economy will not automatically adjust to full employment in the long run.

Accepted Answer

Inflexible wages and input prices can prevent the economy from adjusting to full employment because they hinder the natural adjustment processes like wage reductions that would typically help restore equilibrium.

Question 11

A stable Phillips curve does not allow for the possibility of stagflation.

Accepted Answer

The Phillips curve traditionally suggests an inverse relationship between inflation and unemployment, but stagflation, which involves high inflation and high unemployment, challenges this stable relationship.

Question 12

The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of inflation.

Accepted Answer

The long-run Phillips Curve is a vertical line at the natural rate of unemployment, indicating no trade-off between inflation and unemployment in the long run.

Question 13

In the context of the Phillips curve, stagflation can only be understood as a rightward shift of the curve.

Accepted Answer

Stagflation is a situation where the economy is experiencing both high inflation and high unemployment. This can be caused by a rightward shift of the Phillips curve, which shows the relationship between inflation and unemployment.

Question 14

The long-run aggregate supply curve stays in a fixed position over time.

Accepted Answer

The long-run aggregate supply curve can shift due to changes in factors like technology, resources, and labor force, which affect an economy's potential output.

Question 15

The Laffer Curve suggests that within a certain range, lower tax rates will increase tax revenues.

Accepted Answer

The Laffer Curve posits that at very high tax rates, tax revenues will decrease as taxpayers seek to avoid or evade taxes, while at very low tax rates, tax revenues will also decrease as there is not enough revenue being generated. However, within a certain range, lower tax rates can incentivize economic growth and productivity, leading to increased taxable income and ultimately higher tax revenues.

Question 16

Based on the long-run Phillips Curve, any rate of inflation is compatible in the long run with the natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve is vertical, indicating that in the long run, the natural rate of unemployment is independent of the rate of inflation.

Question 17

A rightward shift of the Phillips Curve suggests that a lower rate of unemployment is associated with each inflation rate.

Accepted Answer

The answer of A rightward shift of the Phillips Curve...

Question 18

According to the simple extended AD-AS model, aggregate demand is a major determinant of the level of output in the long run.

Accepted Answer

In the long run, the simple extended AD-AS model assumes that the economy reaches its potential output level that is determined by the economy's production capacity and the natural rate of unemployment. In the long run, changes in aggregate demand only affect the price level, not the output level. Thus, the level of output in the long run is primarily determined by the supply side of the economy, not aggregate demand.

Question 19

The Phillips Curve shows a positive relationship between the rate of inflation and the unemployment rate.

Accepted Answer

The Phillips Curve traditionally shows an inverse relationship between the rate of inflation and the unemployment rate, suggesting that as inflation increases, unemployment tends to decrease, and vice versa.

Question 20

One implication of the Laffer Curve in supply-side arguments is that cutting taxes may actually reduce the budget deficit, contrary to what traditional economics teaches.

Accepted Answer

The Laffer Curve suggests that lower tax rates could potentially increase total tax revenue by boosting economic activity, which might reduce the budget deficit.

Quiz 38: Extending the Analysis of Aggregate Supply