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Exam 18: Extending the Analysis of Aggregate Supply

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Question 71

True/False

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

A) True
B) False

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Question 72

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The Romer and Romer 2010 paper in the American Economic Review identified the major motivations for most significant legislated tax changes to be the following, except:

A) Adjustments made to match changes in government spending
B) Offsetting the monetary policy pursued by the Federal Reserve
C) Addressing an inherited budget deficit
D) Promoting long-run economic growth

E) A) and B)
F) B) and D)

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Question 73

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

The short-run Phillips Curve assumes an unchanging:

The short-run aggregate supply curve illustrates the idea that if the price level falls, firms will experience:

One implication of the Laffer Curve in supply-side arguments is that cutting taxes may actually reduce the budget deficit, contrary to what traditional economics teaches.

Refer to the graph above. If the government wishes to collect tax revenues equal to R₂, supply-side economists would strongly advise the government to set tax rates at:

Refer to the graph above. 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:

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:

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:

Stagflation can be described as a:

In an aggregate demand-aggregate supply framework, fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, save, and invest would be characterized primarily as a:

In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. Graph A is constructed on the basic assumption that:

A Congressional representative who calls for a decrease in tax rates in order to increase saving, work effort, and economic growth would most likely be advocating:

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.