Chap 35 review
Student: ___________________________________________________________________________
1. In the short run, nominal wages and other input prices are assumed to be: 
A) Unresponsive to product price-level changes, but in the long run they are assumed to be responsive
B) Unresponsive to product price-level changes, and in the long run they are assumed to be unresponsive also
C) Responsive to product price-level changes, but in the long run they are assumed to be unresponsive
D) Responsive to product price-level changes, and in the long run they are assumed to be responsive also
 2. The economy enters the long-run once: 
A) Nominal wages become equal to real wages
B) Real wages become equal to nominal wages
C) Sufficient time has elapsed for wage contracts to expire and nominal wages to adjust to output-price changes
D) Sufficient time has elapsed for real GDP to increase and unemployment to decrease as a consequence
 
3. Assume that initially your nominal wage was $16 an hour and the price index was 100. If the price level increases to 105, then your: 
A) Real wage has increased to $21
B) Real wage has decreased to $15.24
C) Nominal wage has increased to $21
D) Nominal wage has decreased to $15.24
 4. The short-run aggregate supply curve illustrates the idea that if the price level falls, firms will experience: 
A) Falling input costs, so they will increase their output level
B) No change in input costs, so they will not change their output level
C) Falling inputs costs, so they will reduce their output level
D) No change in input costs, so they will reduce their output level
 
5. In the long run, if the price level increases, then nominal wages and other input prices: 
A) Also rise, so firms will reduce their output level
B) Also rise, so firms will not change their output level
C) Not change, so firms will not change their output level
D) Decrease, so firms will increase their output level
    
 6. Refer to the graphs above. Graph A is constructed on the basic assumption that: 
A) The price level is not flexible
B) Nominal wages are unresponsive to price-level changes
C) Real output is unresponsive to price-level changes
D) Unemployment is unresponsive to price-level changes
 
7. Refer to the graphs above. In Graph A, an increase in the price level from P1 to P2 will cause: 
A) The nation's unemployment rate to be greater than the natural rate of unemployment
B) The nation's unemployment rate to be less than the natural rate of unemployment
C) Product prices to decrease
D) Profits to decrease
 8. Refer to the graphs above. In Graph A, a decrease in the price level from P1 to P3 will lead to: 
A) A decrease in profits, an increase in real output, and a decrease in the unemployment rate
B) A decrease in profits, a decrease in real output, and a decrease in the unemployment rate
C) A decrease in profits, a decrease in real output, and an increase in the unemployment rate
D) An increase in profits, an increase in real output, and a decrease in the unemployment rate
 
9. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 and that there is an increase in the price level from P1 to P2. In the long run, this change will lead to: 
A) Lower nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2
B) Higher nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2
C) Lower nominal wages and a movement from equilibrium point x1 to equilibrium point x2
D) Higher nominal wages and a movement from equilibrium point x1 to equilibrium point x2
 10. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 and that there is an increase in the price level from P1 to P2. This change will lead to: 
A) A movement from x1 to x2 in the short run, and the unemployment rate decreases, followed by a shift from x2 to y1 as nominal wages rise in the long run
B) A movement from x1 to x3in the short run, and the unemployment rate decreases, followed by a shift from x3 to x1 as output rises in the long run
C) A movement from x1 to y1 in the short run, and back to x1 in the long run
D) No change in the short run, but a shift from x1 to y1 in the long run
 
11. The short-run aggregate supply curve: 
A) Is vertical and the long-run aggregate supply curve is vertical
B) Slopes upward and the long-run aggregate supply curve slopes upward
C) Slopes upward, but the long-run aggregate supply curve is horizontal
D) Slopes upward, but the long-run aggregate supply curve is vertical
 12. Equilibrium in the long run occurs when: 
A) AD intersects the short-run AS, regardless of output level
B) AD intersects the short-run AS, regardless of price level
C) AD intersects the short-run and the long-run AS curves at the same point
D) The short-run AS curve intersects the long-run AS curve
 
13. In the short-run, demand-pull inflation increases: 
A) Real wages, but in the long run only nominal wages
B) Nominal wages, but in the long run only real wages
C) Real output and the price level, but in the long-run only real output
D) Real output and the price level, but in the long-run only the price level
 14. In the cost-push model of inflation, increases in nominal-wage rates that exceed increases in the productivity of labor: 
A) Increase aggregate supply and the price level in the economy
B) Increase aggregate supply and decrease the price level in the economy
C) Decrease aggregate supply and the price level in the economy
D) Decrease aggregate supply and increase the price level in the economy
 
15. If the government uses stimulative monetary or fiscal policies to counter the effects of cost-push inflation, then the economy is likely to experience: 
A) A decline in nominal wages
B) An inflationary spiral
C) A recession
D) Disinflation
 16. If the government adopts a "hands off" approach to cost-push inflation in the economy, then in the short run there is likely to be: 
A) A rise in real output
B) A fall in unemployment
C) An inflationary spiral
D) A recession
 
17. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then according to the simple extended AD-AS model, in the long run the economy will: 
A) Get back to where it started from
B) Get stuck with high unemployment
C) Experience an inflationary spiral
D) Have a higher price level

18. Refer to the above graph. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. Demand-pull inflation in the short run can best be represented as a shift of: 
A) AS1 to the right
B) AD1 to the right
C) AS1 to the left
D) AD1 to the left
 19. Refer to the above graph. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. Demand-pull inflation in the long run can best be illustrated as a shift of: 
A) AS1 to AS2, and back again to AS1
B) AD1 to AD2, and back again to AD1
C) AS1 to AS2, consequently making AD1 shift to AD2
D) AD1 to AD2, consequently making AS1 shift to AS2
 
20. Refer to the above graph. Stagflation in the short run is best represented as resulting from a shift of: 
A) AD1 to AD2 given a stable AS1 curve
B) AD2 to AD1 given a stable AS1 curve
C) AS1 to AS2 given a stable AD1 curve
D) AS2 to AS1 given a stable AD1 curve
 
21. Refer to the above graph. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the subsequently government implements expansionary policy, then the effect of such policy is to shift: 
A) AD1 to AD2, which increases the price level from P1 to P2, and increases real domestic output from Q3 to Q2
B) AS1 to AS2, which increases the price level from P1 to P2, and decreases real output from Q1 to Q2
C) AD1 to AD2, which increases the price level from P2 to P3, and increases real output from Q2 to Q1
D) AS2 to AS3 which increases the price level from P2 to P3, and decreases real output from Q2 to Q3
 22. Refer to the above graph. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then in the long run the price level will be at: 
A) P1, and output will be at Q1
B) P3, and output will be at Q1
C) P2, and output will be at Q2
D) P3, and output will be at Q3
 
23. The traditional Phillips Curve shows the: 
A) Direct correlation between the rate of inflation and the unemployment rate
B) Inverse correlation between the rate of inflation and the rate of unemployment
C) Direct correlation between the short-run and long-run aggregate supply
D) Inverse correlation between the short-run and long-run aggregate supply
 24. The traditional Phillips Curve showing a tradeoff between inflation and unemployment is based on having a stable: 
A) Aggregate demand and a shifting short-run aggregate supply
B) Short-run aggregate supply and a shifting aggregate demand
C) Long-run aggregate supply and a shifting aggregate demand
D) Aggregate demand and a shifting long-run aggregate supply

 
25. Refer to the graphs above. Assume that the economy is initially at equilibrium where AD2 and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. A movement from point C to point B in graph 2 would most likely be associated in graph 1 with a shift of: 
A) AD to the right
B) AD to the left
C) AS to the right
D) AS to the left
 
26. Refer to the graphs above. Assume that the economy is initially at equilibrium where AD2 and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. If the government implements contractionary or restrictive policy, it would make the economy in graph 2 to: 
A) Move from point C to point B
B) Move from point C to point A
C) Move from point C to point D
D) Remain at point C
 27. Refer to the above 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 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
 
28. Adverse aggregate-supply shocks or stagflation would cause a: 
A) Movement up along a stable Phillips Curve
B) Movement down along a stable Phillips Curve
C) Shift of the Phillips Curve to the left
D) Shift of the Phillips Curve to the right
 29. A rightward shift of the Phillips Curve suggests that: 
A) A higher rate of unemployment is associated with each level of inflation rate
B) A lower rate of inflation is associated with each level of unemployment rate
C) The aggregate supply curve has shifted to the right
D) The aggregate demand curve has shifted to the left
 
30. Stagflation can be described as a: 
A) Shift right in the aggregate supply curve
B) Shift left in the aggregate supply curve
C) Period of stable prices and high unemployment
D) Period of rising prices and low unemployment
 31. Adverse aggregate supply shocks would result in: 
A) A lower rate of inflation and a higher rate of unemployment
B) A higher rate of inflation and a lower rate of unemployment
C) A lower rate of inflation and a lower rate of unemployment
D) A higher rate of inflation and a higher rate of unemployment
 
32. The long-run Phillips Curve is vertical at: 
A) Price level of 100
B) The natural rate of unemployment
C) The natural rate of inflation
D) Potential GDP
 33. Which is a basic proposition of supply-side economics? 
A) The Federal Reserve should target the Federal funds rate rather than the money supply
B) Tax-hikes on business reduce productivity and output and reduce aggregate supply
C) Low marginal tax rates reduce incentives to work, saving, and investment
D) Transfer payments increase incentives to work

 34. The above diagram describes the notion that as tax rates rise from zero percent, tax revenues will: 
A) Increase at first, but then decline eventually as tax rate continues rising
B) Decrease at first, but then increase eventually as tax rate continues rising
C) Rise higher and higher
D) Fall lower and lower until it shrinks to zero
 
35. Refer to the above diagram. If tax rates are between b and d, then supply-side economists are of the opinion that a(n): 
A) Increase in tax revenues will increase tax rates
B) Decrease in tax rates will increase tax revenues
C) Increase in tax rates will increase tax revenues
D) Decrease in tax revenues will decrease tax rates
 36. Refer to the above diagram. Critics of supply-side economics would argue that tax rates are currently between: 
A) b and d and that a decrease in tax rates will decrease tax revenues
B) 0 and b and that a decrease in tax rates will decrease tax revenues
C) 0 and b and that a decrease in tax rates will increase tax revenues
D) b and d and that a decrease in tax rates will increase tax revenues

 
37. Refer to the above graph. A movement from point C to point D on the Laffer Curve represents: 
A) Increased tax rates from T2 to T3 and increased tax revenues from R2 to R3
B) Decreased tax rates from T3 to T2 and increased tax revenues from R2 to R3
C) Decreased tax rates from T3 to T2 and decreased tax revenues from R3 to R2
D) Increased tax rates from T2 to T3 and decreased tax revenues from R3 to R2
 
38. Refer to the Laffer Curve above. A cut in the tax rate from T5 to T4 would: 
A) Decrease tax revenues and support the views of supply-side economists
B) Increase tax revenues and support the views of supply-side economists
C) Increase tax revenues and support the views of mainstream economists
D) Decrease tax revenues and support the views of mainstream economists
 39. Refer to the Laffer Curve above. A cut in the tax rate from T2 to T1 would: 
A) Decrease tax revenues and support the views of supply-side economists
B) Increase tax revenues and support the views of supply-side economists
C) Increase tax revenues and support the views of mainstream economists
D) Decrease tax revenues and support the views of mainstream economists

Chap 35 review Key
 
1. A
 
2. C
 
3. B
 
4. D
 
5. B
 
6. B
 
7. B
 
8. C
 
9. B
 
10. A
 
11. D
 
12. C
 
13. D
 
14. D
 
15. B
 
16. D
 
17. A
 
18. B
 
19. D
 
20. C
 
21. C
 
22. A
 
23. B
 
24. B
 
25. A
 
26. C
 
27. A
 
28. D
 
29. A
 
30. B
 
31. D
 
32. B
 
33. B
 
34. A
 
35. B
 
36. B
 
37. C
 
38. B
 
39. D