Exercises - Extending the Analysis of Aggregate Supply True / False Questions . The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment. There is no trade-off between unemployment and inflation in the long mun. 3. In the short run, output increases in response to a rising price level, but not in the long run. . In the long run, the economy will always move toward full employment. 5. Demand-pull inflation and cost-push inflation have similar effects on real output in the short run. . 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. . According to the simple extended AD-AS model, aggregate demand is a major determinant of the level of output in the Jong run. 8. 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. 10.The implication of the long-run Phillips Curve is that there is no trade-off between inflation and unemployment in the long- mun, 11.A stable Phillips curve does not allow for the possibility of stagflation. 12.The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of inflation. is £ a ~ ny Multiple Choice Questions 1. The level of potential output and location of the long-run aggregate supply curve are determined by A. Federal Reserve policy. B. the price level. C. the intersection of aggregate demand and short-run aggregate supply. D. the natural rate of unemployment. 2. In the extended aggregate demand- aggregate supply model, A. long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve. B. the long-run aggregate supply curve is horizontal. C. the price level is the same regardless of the location of the aggregate demand curve. long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. AS. Price Level Pi 0 Q Real Output3, Refer to the diagram. The initial aggregate demand curve is AD], and the initial aggregate supply curve is AS]. Demand- pull inflation in the short run is best shown as a shift of the aggregate demand curve trom AD] to AD2. B. a move fromd to b toa. C.amove directly fromd toa. D. a shift of the aggregate supply curve from AS] to AS2. 4. Refer to the diagram. The initial aggregate demand curve is ADJ, and the initial aggregate supply curve is AS}. In the long tun, demand- pull inflation is best shown as shift of aggregate demand from AD] to "AD2, followed by a shift of aggregate supply from AS] to AS. B. a move fromd to b toa. C. a shift of aggregate supply from AS] to AS2, followed by a shift of aggregate demand from AD] to AD2. D.amove froma to d. 5. Refer to the diagram. The initial aggregate demand curve is ADJ, and the initial aggregate supply curve is ASI. In the long tun, the aggregate supply curve is vertical in the diagram because A. nominal wages and other input prices are assumed to be fixed. B. real output level Qf is the potential level of output. C. price level increases produce perfectly offsetting changes in nominal wages and other input prices. D. higher-than-expected rates of actual inflation reduce real output only temporarily. 6. Refer to the diagram. The initial aggregate demand curve is AD] and the initial aggregate supply curve is AS]. Cost-push inflation in the short run is best represented asa leftward shift of the aggregate supply curve from AS] to AS2. B. rightward shift of the aggregate demand curve from AD] to AD2. C. move from d to to a. D. move from d directly to a. 7. Refer to the diagram. The initial aggregate demand curve is AD], and the initial aggregate supply curve is AS]. Assuming no change in aggregate demand, the long- mun response to a recession caused by cost- push inflation is best depicted as a A. move from a to d along the long-run aggregate supply curve. B, rightward shift of the aggregate supply curve from AS? to AS]. C. move froma toc tod. D. lefiward shift of the aggregate supply curve from AS] to AS2. 8. Refer to the diagram. The initial aggregate demand curve is AD], and the initial aggregate supply curve is AS]. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD] to AD2, A. teal output will rise above Of B. the price level will rise from P| to P2. C. it is possible that aggregate supply will shift rightward from AS? because nominal wage demands will rise. D. the price level will rise fom P? to P39. If government uses fiscal policy to restrain ost-push inflation, we can expect 1 unemployment rate to rise. the unemployment rate to fall. C. the aggregate demand curve to. shift rightward. D. tax-rate declines government spending. and increases in 10. If government uses its stabilization policies to maintain full employment under conditions of cost-push inflation, A. a deflationary spiral is likely to occur. B. an inflationary spiral is likely to occur. C. stagflation is likely to occur. D. the Phillips Curve is likely to shift inward. ASie2 AS Price Level 2 AD, 0 Q, Real GDP Q LL. Refer to the graphs, where the subscripts on the labels denote years 1 and 2. In year 1 the economy A. is in long-run equilibrium at output 1. B. is in short-run equilibrium at output QO], but not in long-run equilibrium. C. cannot be in long-run equilibrium because output changes in period 2. D. is in a recession, based on output QO] being below output 02. 12. Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can conclude that from year 1 to year 2, A. the economy recovered from a recession. Q the economy experienced economic growth and inflation. C. output grew and the unemployment rate fell. D. the govemment engaged in expansionary fiscal and monetary policies. 13. Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can clearly conclude that the economy A. is not at full employment in either year. B. is at full employment in year 1 but not in year 2. C. is at full employment in year 2 but not in car 1. is at full employment in both years. 14. The traditional Phillips Curve suggests a trade-off between Let Shute A. price stability and income equality. ©) the level of unemployment and inflation C. unemployment and income equality. D. economic growth and full employment. 15, The traditional Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment, A. unemployment may actually increase because of the crowding-out effect. B. tax revenues may increase even though tax rates have been reduced. C. the inflation rate will increase. D. the natural rate of unemployment may 3fall. 16. Inflation accompanied by falling real output and employment is known as A. Laffer's law. B. Okun's law. stagflation. D. the Phillips Curve. 17. Anadverse aggregate supply shock A. automatically shifts the aggregate demand curve rightward. B. causes the Phillips Curve to shift leftward. and downward. C. can be caused by a boost in the rate of rowth of productivity. Cem cause stagflation. 18. Which of the following is a tue statement? A. There is a long-run trade-off between inflation and unemployment. B. There is no trade-off between inflation and unemployment in the long run. C. The short-run Phillips Curve is horizontal. D. The long-run Phillips Curve is horizontal. 19. Suppose that the Consumer Price Index 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. 20. Disinflation occurs when A. the price level is falling. B. investment plans exceed saving. C. a speculative investment "bubble" is bursting. the inflation rate is declining. 21. 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. o 2 ° * = Annual Rate of Inflation (%) eo ° « > by +—+—_}+—_ + ++ +++ 9423456789 Unemployment Rate (%) 22. The 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 ‘unemployment. eliminating 23. Refer to the diagram. The natural rate of unemployment for this economy is A. 3 percent. B. 5 percent. C. 6 percent. D. 9 percent.24. In the long run, A. attempts to "fine-tune" the economy cause the rate of unemployment to accelerate. B. there is no inflation-unemployment trade- off. C. there is an inflation-unemployment trade- off, and the terms of that trade-off have worsened in recent years. D. there is an inflation-unemployment trade- off, but the terms of that trade-off have improved in recent years. PCip = § 6+ “ By. 5 = = 0 45 7 Unemployment Rate (%) 25. Refer to the 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. B. permanently fall from 5 percent to 4 percent. temporarily rise from 5 percent to 7 ‘percent. D. permanently rise from 5 percent to 7 percent. 26. Refer to the 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. ‘educe corporate profits in real terms. Ore no effect on the unemployment rate. . reduce real domestic output. 27. Refer to the 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. B. move directly from c to b. C.remain at a. O@)nove from c to d and eventually to a. 28. In the long run, demand-pull inflation A. starts out with a shift in the AS curve but no shift of the AD curve. B. starts out with a rightward shift in the AD curve, followed by a resulting leftward shift of the short-run AS curve. C. starts out with a leftward shift in the AD curve, followed by a resulting rightward shift of the short-run AS curve. D. involves a shift of the AD curve only, with no shift of the AS curve. 29. If the govemment uses expansionary 5monetary or fiscal policies to counter the output effects of cost-push inflation, then the economy is likely to experience A. adecline in nominal wages. B. an inflationary spiral. C. arecession. D. disinflation. AS, AS, AS, zg 3 a P, eo eh a Bi 0 QQ, Q, Real GDP 30. Refer to the graph. Stagflation in the short run is best represented as resulting froma shift of A. AD1 to AD?. given a stable AS] curve. B. AD? to ADI, givena stable AS] curve. Os to AS2, givena stable AD] curve. . AS? to AS], given a stable AD] curve. om zz 3 s3 3 Ha 3 E28! ER 336 #54 at2 0 Q QQ 012345 Real Domestic Output Unemployr Graph 1 or 31. Refer to the graphs. Assume that the economy is initially at equilibrium where AD? and AS intersect in Graph 1, and also assume that the economy is initially at point Cin Graph 2. A movement from point C to point B in graph 2 would most likely be associated, in graph 1, jth a shift of AD to the right. D to the left. C. AS to the right. D. AS to the lefi. 32. Refer to the graphs. Assume that the economy is initially at equilibrium where AD? and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. If the government implements a contractionary or restrictive policy, it would make the economy in graph 2 A. move from point C to point B. ove from point C to point A. ove from point C to point D. . remain at point C. 33. Refer to the graphs. Assume that the economy starts out at point D in Graph 2, whereas full employment would be attained at point C. The Phillips curve shown 6suggests that full employment A. can be attained only with a higher inflation rate. B. may be attained along with a lower inflation rate. C, cannot be attained regardless of inflation rate. D. can be attained by implementing restrictive fiscal or monetary policy. 34, Stagflation can be described as a shifi right in the aggregate supply curve, @ shift left in the aggregate supply curve. period of stable prices and high ‘unemployment. D. period of rising prices and low ‘unemployment. 35. If the expected rate of inflation rises, then the short-run Phillips Curve will A. shift to the right. B. shift to the left. C. become vertical. D. become flat.