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Long-run Phillips Curve


Type: A Topic: 4 E: 300 MA: 300

69. Which of the following is a true statement?

A) Under normal conditions there is a short-run tradeoff between inflation and unemployment.

B) There is a long-run tradeoff between inflation and unemployment.

C) The short-run Phillips Curve is vertical.

D) The long-run Phillips Curve is horizontal.

Answer: A


Type: A Topic: 4 E: 299 MA: 299

70. Which of the following is a true statement?

A) There is a long-run tradeoff between inflation and unemployment.

B) The short-run Phillips Curve is vertical.

C) The long-run Phillips Curve is horizontal.

D) Adverse aggregate supply shocks can simultaneously worsen unemployment and inflation.

Answer: D


Type: A Topic: 4 E: 300 MA: 300

71. Which of the following is a true statement?

A) There is a long-run tradeoff between inflation and unemployment.

B) There is no tradeoff between inflation and unemployment in the long run.

C) The short-run Phillips Curve is horizontal.

D) The long-run Phillips Curve is horizontal.

Answer: B


Type: A Topic: 4 E: 299 MA: 299

72. Which of the following is a true statement?

A) The short-run Phillips Curve is horizontal.

B) The long-run Phillips Curve is horizontal.

C) There is a long-run tradeoff between inflation and unemployment.

D) The short-run Phillips Curve is downward sloping.

Answer: D


Type: A Topic: 4 E: 301 MA: 301

73. Which of the following is a true statement?

A) There is a long-run tradeoff between inflation and unemployment.

B) There is no tradeoff between inflation and unemployment in the short-run.

C) The short-run Phillips Curve is horizontal.

D) The long-run Phillips Curve is vertical.

Answer: D


Type: F Topic: 4 E: 300 MA: 300

74. In the last half of the 1990s, the usual short-run tradeoff between inflation and unemployment did not arise because:

A) the Fed held interest rates constant.

B) the Federal government balanced its budget.

C) the U.S. personal savings rate rose.

D) productivity (and thus aggregate supply) grew faster than previously.

Answer: D


Type: C Topic: 4 E: 300 MA: 300

75. Suppose that the CPI for a particular economy rose from 110 to 120 in year 1, 120 to 130 in year 2, and 130 to 140 in year 3. We could conclude that this economy is experiencing:

A) accelerating inflation. B) deflation. C) disinflation. D) a constant rate of inflation.

Answer: C


Type: D Topic: 4 E: 302 MA: 302

76. Disinflation occurs when:

A) the price level is falling. C) a speculative investment "bubble" is bursting.

B) investment plans exceed saving. D) the inflation rate is declining.

Answer: D


Type: D Topic: 4 E: 302 MA: 302

77. As distinct from reductions in the price level, reductions in the rate of inflation are referred to as:

A) dollar depreciation. B) stagflation. C) deflation. D) disinflation.

Answer: D


Type: A Topic: 4 E: 302 MA: 302

78. When the actual rate of inflation is less than the expected rate:

A) the unemployment rate will temporarily rise.

B) firms will increase their output to recoup their falling profits.

C) the unemployment rate will temporarily fall.

D) firms will experience rising profits and thus increase their employment.

Answer: A


Type: A Topic: 4 E: 302 MA: 302

79. When the actual rate of inflation exceeds the expected rate:

A) the unemployment rate will temporarily rise.

B) firms will experience rising profits and thus increase their employment.

C) the actual rate of inflation will fall.

D) nominal wages will decline.

Answer: B


Use the following to answer questions 80-85:





Type: G Topic: 4 E: 301 MA: 301

80. The above diagram is the basis for explaining:

A) the traditional Phillips Curve.

B) the long-run Phillips Curve.

C) how central planning can make full employment and price level stability compatible goals.

D) new policies for eliminating unemployment.

Answer: B


Type: G Topic: 4 E: 301 MA: 301

81. The natural rate of unemployment for this economy is:

A) 3 percent. B) 5 percent. C) 6 percent. D) 4 percent.

Answer: B


Type: G Topic: 4 E: 301 MA: 301

82. Refer to the above diagram. Assume the economy is initially at point b1. With a time lag between price and nominal wage adjustments, an increase in aggregate demand will temporarily move the economy from:

A) b2 to b1. B) c1 to b2. C) b1 to c1. D) b1 to b2.

Answer: C


Type: G Topic: 4 E: 301 MA: 301

83. Refer to the above diagram and assume the economy is initially at point b1. Which of the following movements is consistent with the traditional Phillips Curve?

A) the movement from b1 to b2 C) the movement from c1 to b2

B) the movement from b1 to c1 D) the movement from b2 to b1

Answer: B


Type: G Topic: 4 E: 301 MA: 301

84. Refer to the above diagram and assume the economy is initially at point b1. Point c1 represents:

A) a stable position because reality and expectations are consistent.

B) a stable position because full employment and a constant annual inflation rate are represented.

C) an unstable situation because government will undertake contractionary policies

D) an unstable situation because nominal wage rates will increase.

Answer: D

Type: G Topic: 4 E: 301 MA: 301

85. Refer to the above diagram and assume the economy is initially at point b1. The long-run relationship between the unemployment rate and the rate of inflation is represented by:

A) the line connecting b1 and c1. C) the line connecting c1 and b2.

B) the line through b1, b2, b3 , and b4. D) any line parallel to the horizontal axis.

Answer: B


Type: C Topic: 4 E: 301 MA: 301

86. Government can push the unemployment rate below the natural rate only by:

A) instituting supply-side economic policies.

B) producing a higher rate of inflation than people expect.

C) balancing the federal budget.

D) achieving zero inflation.

Answer: B


Type: A Topic: 4 E: 301 MA: 301

87. In the long run:

A) attempts to "fine tune" the economy cause the rate of unemployment to accelerate.

B) there is no long-run inflation-unemployment tradeoff.

C) there is an inflation-unemployment tradeoff and the terms of that tradeoff have worsened in recent years.

D) there is an inflation-unemployment tradeoff, but the terms of that tradeoff have improved in recent years.

Answer: B


Use the following to answer questions 88-91:





Type: G Topic: 4 E: 301 MA: 301

88. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent. If the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the unemployment rate will:

A) temporarily fall from 5 percent to 4 percent. C) temporarily rise from 5 percent to 7 percent.

B) permanently fall from 5 percent to 4 percent. D) permanently rise from 5 percent to 7 percent.

Answer: C


Type: G Topic: 4 E: 301 MA: 301

89. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent. In the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will:

A) reduce the unemployment rate. C) have no effect on the unemployment rate.

B) reduce corporate profits in real terms. D) reduce real domestic output.

Answer: C


Type: G Topic: 4 E: 301 MA: 301

90. Refer to the above diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point c where the expected and actual rates of inflation are each 4 percent. If the actual rate of inflation unexpectedly rises from 4 percent to 6 percent, the economy will:

A) move from a to b and eventually to c. C) remain at a.

B) move directly from c to b. D) move from c to d and eventually to a.

Answer: D


Type: G Topic: 4 E: 301 MA: 301

91. In the above diagram:

A) any rate of inflation is consistent with the natural rate of unemployment in the long run.

B) inflation can occur but disinflation cannot occur.

C) unemployment rates exceeding the natural rate are permanent.

D) unemployment rates less than the natural rate are permanent.

Answer: A


Use the following to answer questions 92-95:





Type: G Topic: 4 E: 301 MA: 301

92. Refer to the above diagram. Point b on short-run Phillips Curve PC1 represents a rate of:

A) inflation below the natural rate. C) unemployment above the natural rate.

B) inflation above the natural rate. D) unemployment below the natural rate.

Answer: D


Type: G Topic: 4 E: 301 MA: 301

93. Refer to the above diagram. Point b would be explained by:

A) an actual rate of inflation that exceeds the expected rate.

B) an actual rate of inflation that is less than the expected rate.

C) cost-push inflation.

D) an increase in long-run aggregate supply.

Answer: A


Type: G Topic: 4 E: 301 MA: 301

94. Refer to the above diagram. Point b would not be permanent because the:

A) economy would move from b to a on PC1.

B) short-run Phillips Curve would shift from PC1 to PC2 and unemployment would increase to the natural rate at c.

C) economy would immediately move from b to c to d.

D) economy would move from b directly to d.

Answer: B


Type: G Topic: 5 E: 301 MA: 301

95. Refer to the above diagram. The move of the economy from c to e on short-run Phillips Curve PC2 would be explained by an:

A) increase in aggregate demand in the economy.

B) increase in aggregate supply in the economy.

C) actual rate of inflation that is less than the expected rate.

D) actual rate of inflation that exceeds the expected rate.

Answer: C


Taxation and aggregate supply


Type: D Topic: 5 E: 302 MA: 302

96. Which of the following is a tenet of supply-side economics?

A) High marginal tax rates severely discourage work, saving, and investment.

B) Increases in social security taxes and other business taxes shift the aggregate supply curve to the right.

C) The Federal Reserve should adhere to a monetary rule that limits increases in the money supply to a 5 percent annual rate.

D) Transfer payments increase incentives to work.

Answer: A


Type: F Topic: 5 E: 303 MA: 303

97. The Laffer Curve is a central concept in:

A) monetarism. B) Keynesianism. C) welfare economics. D) supply-side economics.

Answer: D


Use the following to answer questions 98-101:





Type: G Topic: 5 E: 303 MA: 303

98. The above curve is known as the:

A) Taylor rule. B) Okun Curve. C) Laffer Curve. D) Phillips Curve.

Answer: C


Type: G Topic: 5 E: 303 MA: 303

99. Refer to the above diagram. Supply-side economists believe that tax rates are:

A) such that an increase in tax rates will increase tax revenues.

B) at some level below b.

C) at some level above b.

D) at d.

Answer: C


Type: G Topic: 5 E: 303 MA: 303 Status: New

100. In the above curve, a decline in the tax rate from c to b would:

A) greatly increase tax revenue. C) leave tax revenue about the same as before.

B) greatly decrease tax revenue. D) shift the curve to the left.

Answer: A

Type: G Topic: 5 E: 303 MA: 303 Status: New

101. If the current tax rate is currently c and the government wants to maximize tax revenue, it should:

A) leave the tax rate at c. C) reduce the tax rate to b.

B) increase the tax rate to d. D) reduce the tax rate to a.

Answer: C


Type: A Topic: 5 E: 303 MA: 303

102. Supply-side economist Arthur Laffer has argued that:

A) there is no empirically proven relationship between tax rates and incentives.

B) large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand.

C) the only way to eliminate inflation is to increase taxes to induce a recession severe enough to eliminate inflationary expectations.

D) large cuts in income taxes will increase aggregate demand more than aggregate supply.

Answer: B


Type: A Topic: 5 E: 303 MA: 303

103. A basic criticism of supply-side economics is that:

A) empirical research clearly shows that incentives to work and invest vary directly with marginal tax rates.

B) lower taxes will increase aggregate supply much more than they will increase aggregate demand.

C) lower taxes will increase aggregate demand much more than they will increase aggregate supply.

D) higher taxes will reduce incentives to work, invest, and innovate.

Answer: C


Type: A Topic: 5 E: 304 MA: 304

104. Critics of supply-side economics:

A) argue that a tax cut will increase aggregate supply by more than it increases aggregate demand.

B) contend that the relationship between tax rates and economic incentives is small and of uncertain direction.

C) believe that a decline in tax rates will increase tax revenues.

D) point out that tax cuts enable households to "buy more leisure" by working less.

Answer: B


Use the following to answer questions 105-106:





Type: D Topic: 5 E: 304 MA: 304

105. If graphed, the relationship shown above would depict this economy's:

A) Laffer Curve. B) Lorenz Curve. C) Tax Freedom Curve. D) Phillips Curve.

Answer: A

Type: F Topic: 5 E: 304-305 MA: 304-305

106. In 1993 the Federal government boosted income tax rates. In the seven years that followed:

A) tax revenues fell slightly. C) the unemployment rate increased.

B) productivity growth slowed. D) tax revenues expanded rapidly.

Answer: D

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