Chapter 16

1. For macroeconomics, the short run is a period in which nominal wages
A.remain fixed as the price level stays constant
B.change as the price level stays constant
C.remain fixed as the price level changes
D.change as the price level changes


2. Once sufficient time has elapsed for wage contracts to expire and nominal wage adjustments to occur, the economy enters
A.the short run
B.the long run
C.a period of inflation
D.a period of unemployment


3. A graph of the short-run aggregate supply curve is
A.downsloping, and a graph of the long-run aggregate supply is upsloping
B.upsloping, and a graph of the long-run aggregate supply is vertical
C.upsloping, and a graph of the long-run aggregate supply is downsloping
D.vertical, and a graph of the long-run aggregate supply is upsloping


4. Assume that initally your nominal wage was $10 an hour and the price index was 100. If the price level increases to 110, then your
A.real wage has increased to $11.00
B.real wage has decreased to $9.09
C.nominal wage has increased to $11.00
D.nominal wage has decreased to $9.09


5. In the extended AD-AS model, demand-pull inflation occurs because of an increase in aggregate demand that will eventually produce
A.an increase in real wages, thus a decrease in the short-run aggregate supply curve
B.an increase in nominal wages, thus an increase in the short-run aggregate supply curve
C.a decrease in nominal wages, thus a decrease in the short-run aggregate supply curve
D.an increase in nominal wages, thus a decrease in the short-run aggregate supply curve


6. In the short run, demand-pull inflation increases real
A.output and decreases the price level
B.wages and nominal wages
C.output and the price level
D.wages and decreases nominal wages


7. In the long run, demand-pull inflation
A.decreases real wages
B.increases the price level
C.increases the unemployment rate
D.decreases real output


8. A likely result of the government trying to reduce the unemployment associated with cost-push inflation through stimulative fiscal policy or monetary policy is
A.an inflationary spiral
B.stagflation
C.a recession
D.disinflation


9. What will occur if the government adopts a hands-off approach to cost-push inflation?
A.an increase in real output
B.a fall in unemployment
C.demand-pull inflation
D.a recession


10. If prices and wages are flexible, a recession will increase real wages as the price level falls. Eventually, nominal wages will
A.fall to the previous real wages, and the short-run aggregate supply will increase
B.rise to the previous real wages, and the short-run aggregate supply will increase
C.fall to the previous real wages, and the short-run aggregate supply will decrease
D.rise to the previous real wages, and the short-run aggregate supply will decrease


11. The traditional Phillips Curve is based on the idea that with a constant short-run aggregate supply curve, the greater the increase in aggregate demand
A.the greater the increase in the unemployment rate
B.the greater the increase in the rate of inflation
C.the greater the increase in real output
D.the smaller the increase in nominal wages


12. The traditional Phillips Curve shows the
A.inverse relationship between the rate of inflation and the unemployment rate
B.inverse relationship between the nominal and the real wage
C.direct relationship between unemployment and demand-pull inflation
D.tradeoff between the short run and the long run


13. Supply shocks which cause a leftward shift in the aggregate supply curve, aggregate demand remaining constant, will
A.decrease the price level
B.decrease the unemployment rate
C.increase real output
D.increase both the price level and the unemployment rate


14. Which would be a factor contributing to the demise of stagflation during the 1982 ­ 1989 period?
A.a lessening of foreign competition
B.a strengthening of the monopoly power of OPEC
C.a recession brought on largely by a tight monetary policy
D.an increase in regulation of airline and trucking
industries


15. The shift in the Phillips Curve during the 1982 ­ 1989 period was the consequence of a
A.rightward shift in aggregate demand
B.rightward shift in aggregate supply
C.leftward shift in aggregate demand
D.leftward shift in aggregate supply


16. The natural rate hypothesis suggests that the economy is stable only in the
A.short run at the natural rate of unemployment
B.short run at the natural rate of inflation
C.long run at the natural rate of unemployment
D.long run at the natural rate of inflation


17. The adaptive expectations theory suggests that if increases in nominal wage rates lag behind increases in the price level andgovernment attempts to reduce unemployment by using fiscal and monetary policies, then employment
A.and the price level increase in the long run
B.remains constant and the price level increases in the short run
C.increases and the price level remains constant in the short run
D.remains constant and the price level increases in the long run


18. The rational expectations theorists contend that when government attempts to reduce unemployment by using monetary and fiscal policies, unemployment decreases
A.temporarily and the price level rises
B.permanently and the price level rises
C.both temporarily and permanently and the price level rises
D.neither temporarily nor permanently and the price level rises


19. In the view of natural rate theorists, the long-run Phillips Curve is
A.horizontal
B.vertical
C.upsloping
D.downsloping


20. Disinflation, or reductions in the rate of inflation, can be explained based on the natural rate conclusion that when the
A.actual rate of inflation is lower than the expected rate, the unemployment rate will rise to bring the expected and actual rates into balance
B.expected rate of inflation is lower than the actual rate, the unemployment rate will rise to bring the expected and actual rates into balance
C.actual rate of inflation is higher than the expected rate, the unemployment rate will fall to bring the expected and actual rates into balance
D.expected rate of inflation is higher than the actual rate, the unemployment rate will fall to bring the expected and actual rates into balance


21. The natural rate theory suggests that the aggregate supply curve
A.is stable in the short run so long as nominal wages do not increase in the short run in response to the increase in the price level
B.is stable in the long run because real wages are continually changing
C.will shift to the right when the price of capital increases
D.will shift to the right when nominal wages increase


22. Supply-side economists contend that the U.S. system of taxation reduces
A.unemployment but causes inflation
B.incentives to work, save, and invest
C.transfer payments to the poor
D.the effects of cost-push inflation


23. Based on the Laffer Curve, a cut in the tax rate from 100% to a point before the maximum level of tax revenue will
A.increase the price level
B.increase tax revenues
C.decrease real output
D.decrease the real wages


24. In the case of cuts in tax rates, most economists think that
A.the demand-side effects exceed the supply-side effects
B.the supply-side effects exceed the demand-side effects
C.the demand-side and supply-side effects offset each other
D.there are only supply-side effects


25. One general criticism of Reaganomics of the 1981 ­ 1988 period was that it failed to have a significant effect on
A.cuts in personal and corporate income tax rates
B.increases in saving and investment
C.reductions in government regulation
D.renewed interest in entrepreneurship



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