Question 1

The long run aggregate supply curve is upward-sloping because real wages eventually change by
the same amount as changes in the price level.

Accepted Answer

The long run aggregate supply curve is vertical, not upward-sloping, because in the long run, output is determined by factors such as capital, labor, and technology, not by the price level. Real wages adjust to maintain equilibrium in the labor market, making the quantity of output supplied independent of the price level in the long run.

Question 2

When the economy is experiencing cost-push inﬂation, an inﬂationary spiral is likely to result when
the government adopts a hands-off policy.

Accepted Answer

Cost-push inflation typically results from increased costs of production or supply shortages, leading to higher prices. An inflationary spiral, where inflation leads to higher wages, leading to higher prices, and so on, is more often associated with demand-pull inflation and might not directly result from a hands-off policy in the context of cost-push inflation. Government intervention or lack thereof can influence the outcome, but a hands-off policy alone does not necessarily lead to an inflationary spiral in the context of cost-push inflation.

Question 3

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 vertical at the economy's natural rate of unemployment, not inflation, indicating that there is no trade-off between inflation and unemployment in the long run.

Question 4

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

In the simple extended AD-AS model, if the economy is in a recession, prices and nominal wages will eventually fall, shifting the short-run aggregate supply curve to the right, which will increase output and decrease prices. This adjustment process eventually leads to the long-run equilibrium, where output returns to its full-employment level.

Question 5

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

Accepted Answer

The Phillips Curve illustrates a negative relationship between the rate of inflation and the unemployment rate, suggesting that higher inflation is associated with lower unemployment and vice versa.

Question 6

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

Accepted Answer

A rightward shift of the Phillips Curve means that for any given level of unemployment, the inflation rate is higher than before. Therefore, a lower rate of unemployment is not associated with each inflation rate but rather with a higher inflation rate.

Question 7

Demand-pull inﬂation and cost-push inﬂation have similar effects on real output in the short run.

Accepted Answer

Demand-pull inflation typically leads to an increase in real output in the short run due to higher demand, while cost-push inflation can reduce real output as higher production costs make it more expensive to produce goods and services.

Question 8

In the long run, the economy will always move toward full employment.

Accepted Answer

This is a well-accepted principle in macroeconomics known as the natural rate of unemployment. As the economy stabilizes over time, it will naturally reach a level of full employment where the only remaining unemployment is frictional or voluntary. However, this process can be impacted by various factors such as government policies, external shocks, and technological advancements, causing fluctuations and temporary deviations from full employment.

Question 9

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

Accepted Answer

Stagflation, characterized by high inflation and unemployment, can be represented by a rightward shift of the Phillips curve, indicating a breakdown in the inverse relationship between inflation and unemployment.

Question 10

According to the simple extended AD-AS model, demand-pull inﬂation and cost-push inﬂation have
the same effect on output in the long run.

Accepted Answer

In the long run, the economy is expected to return to its natural level of output, regardless of whether the inflation is demand-pull or cost-push, as prices and wages adjust.

Question 11

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

Accepted Answer

The Phillips curve traditionally illustrates an inverse relationship between inflation and unemployment, suggesting that higher inflation comes with lower unemployment and vice versa. Stagflation, a combination of high inflation and high unemployment, contradicts this stable relationship, indicating that the curve does not account for or allow for such a scenario.

Question 12

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 suggests that there is a trade-off between unemployment and inflation in the short run, but in the long run, there is no such trade-off. Therefore, stimulative policies may reduce unemployment in the short run but only lead to higher inflation in the long run.

Question 13

In the short run, output increases in response to a rising price level, but not in the long run.

Accepted Answer

In the short run, producers may increase production in response to a rising price level due to the price effect and profit effect. However, in the long run, factors of production, such as labor and capital, are more flexible and can be adjusted, leading to a shift in the aggregate supply curve. In the long run, the price level has no effect on the level of output.

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 the factors of production (like technology, labor, and capital), which affect the productive capacity of an economy over time.

Question 15

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 leads to a decrease in output and employment, while demand-pull inflation leads to an increase in output and employment. Therefore, the long run effects of these two types of inflation are not identical, even if the government adopts a hands-off policy toward inflation.

Question 16

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

According to the simple extended AD-AS model, in the long run, the level of output is determined by the economy's potential output, which is determined by factors such as technology, capital stock, and labor force. Therefore, aggregate demand does not have a significant impact on the long run level of output in this model.

Question 17

According to the simple extended AD-AS model, cost-push inﬂation does not last in the long run if
the government leaves the economy alone.

Accepted Answer

In the simple extended AD-AS model, cost-push inflation is considered a temporary shock that shifts the short-run aggregate supply curve leftward. However, over time, the economy will adjust and the long-run aggregate supply curve will shift rightward, returning the economy to the original equilibrium with lower prices and the same level of output. If the government does not intervene with policies that distort markets or exacerbate the inflationary pressures, the adjustment process will occur smoothly and efficiently.

Question 18

In the short run, demand-pull inﬂation will drive up the price level and increase real output, but in the
long run, only the price level will rise.

Accepted Answer

In the short run, demand-pull inflation can increase both the price level and real output due to the economy's ability to adjust output in response to increased demand. However, in the long run, the economy reaches its full employment level, and any further increases in demand only lead to higher prices, not an increase in real output.

Question 19

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 shows that in the long-run, there is no trade-off between inflation and unemployment. This means that over time, any attempt to decrease unemployment through expansionary monetary or fiscal policies will only result in higher inflation rates in the long run. In the long run, the trade-off disappears, and the economy settles at the natural rate of unemployment.

Question 20

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

Accepted Answer

If wages and other input prices are inﬂexible, then firms cannot easily adjust their costs and may not be able to increase production and employment to reach full employment levels in the long run. Without this automatic adjustment, government intervention may be necessary to boost demand and stimulate job creation.

Quiz 18: Extending the Analysis of Aggregate Supply

The long run aggregate supply curve is upward-sloping because real wages eventually change by the same amount as changes in the price level.

When the economy is experiencing cost-push inﬂation, an inﬂationary spiral is likely to result when the government adopts a hands-off policy.

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

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.

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

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

Demand-pull inﬂation and cost-push inﬂation have similar effects on real output in the short run.

In the long run, the economy will always move toward full employment.

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

According to the simple extended AD-AS model, demand-pull inﬂation and cost-push inﬂation have the same effect on output in the long run.

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

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.

In the short run, output increases in response to a rising price level, but not in the long run.

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

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.

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

According to the simple extended AD-AS model, cost-push inﬂation does not last in the long run if the government leaves the economy alone.

In the short run, demand-pull inﬂation will drive up the price level and increase real output, but in the long run, only the price level will rise.

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

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