Chapter 18 – Extending the Analysis of Aggregate Supply
89. Based on the Laffer Curve, a cut in the tax rate from 100 percent to a rate lower than the
maximum-revenue rate will:
90. The above diagram describes the notion that as tax rates rise from zero percent, tax
revenues will:
Chapter 18 – Extending the Analysis of Aggregate Supply
91. Refer to the above diagram. If tax rates are between b and d, then supply-side economists
are of the opinion that a(n):
92. Refer to the above diagram. Critics of supply-side economics would argue that tax rates
are currently between:
Chapter 18 – Extending the Analysis of Aggregate Supply
93. Refer to the above graph. A movement from point C to point D on the Laffer Curve
represents:
94. Refer to the Laffer Curve above. A cut in the tax rate from T5 to T4 would:
95. Refer to the Laffer Curve above. A cut in the tax rate from T2 to T1 would:
Chapter 18 – Extending the Analysis of Aggregate Supply
96. Refer to the Laffer Curve above. An increase in the tax rate from T3 to T4 would:
97. Refer to the Laffer Curve above. An increase in the tax rate from T2 to T3 would:
98. Most economists think that:
Chapter 18 – Extending the Analysis of Aggregate Supply
99. A senator states: “We need to cut taxes in order to increase incentives to work and
produce, so that we can pull the nation out of this economic slump.” A mainstream economist
who is a critic of this policy would likely reply that:
100. From the perspective of supply-side economists, a cut in tax rates will:
Chapter 18 – Extending the Analysis of Aggregate Supply
101. One significant criticism of the major proposition of supply-side economics during the
period 1980-1988 was that:
Chapter 18 – Extending the Analysis of Aggregate Supply
102. Refer to the above graph. If the economy is in initial equilibrium at AD1 and AS1, then
from a strict supply-side perspective a cut in taxes or tax rates would produce an equilibrium
price and quantity of:
103. Refer to the above graph. If the economy is initially at equilibrium at the intersection of
AD1 and AS1 and there is a tax cut, then, from a skeptical mainstream perspective, the
immediate impact is that aggregate:
104. One criticism against “supply-side” cuts in marginal tax rates is that they fail to:
Chapter 18 – Extending the Analysis of Aggregate Supply
105. Which presidential administration is most closely associated with the economic policies
of supply-side economics?
106. The idea that reductions in tax rates will increase tax revenue is illustrated by the:
107. To convey the point about supply-side economics, economist Arthur Laffer likened
taxpayers to:
Chapter 18 – Extending the Analysis of Aggregate Supply
108. Economist Arthur Laffer argued that Robin Hood and his men would:
109. The short run in macroeconomics is a period in which nominal wages remain fixed even
as the general price level changes.
110. In the short run, output increases with the price level, but not in the long run.
Chapter 18 – Extending the Analysis of Aggregate Supply
111. The long run aggregate supply curve is upward-sloping because real wages eventually
change by the same amount as changes in the price level.
112. In the long run, the economy will always move towards full employment.
113. In the short run, demand-pull inflation will drive up the price level and increase real
output; but in the long run, only the price level will rise.
114. Demand-pull inflation and cost-push inflation have similar effects on real output in the
short run.
Chapter 18 – Extending the Analysis of Aggregate Supply
115. According to the simple extended AD-AS model, cost-push inflation does not last in the
long run.
116. 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.
117. When the economy is experiencing cost-push inflation, an inflationary spiral is likely to
result when the government adopts a hands-off policy.
118. 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.
Chapter 18 – Extending the Analysis of Aggregate Supply
119. If wages and other input prices are inflexible, then the economy will not automatically
adjust to full employment in the long run.
120. According to the simple extended AD-AS model, if the economy is in a recession, prices
and nominal wages will eventually fall, and the short-run aggregate supply curve increases, so
that real output returns to its full-employment level in the long run.
121. According to the simple extended AD-AS model, aggregate demand is a major
determinant of the level of output in the long run.
122. The long-run aggregate supply curve stays in a fixed position over time.
123. The Phillips Curve shows a positive relationship between the rate of inflation and the
unemployment rate.
124. A rightward shift of the Phillips Curve suggests that a lower rate of unemployment is
associated with each inflation rate.
125. In the context of the Phillips curve, stagflation can only be understood as a rightward
shift of the curve.
126. A stable Phillips curve does not allow for the possibility of stagflation.
Chapter 18 – Extending the Analysis of Aggregate Supply
127. The implication of the long-run Phillips Curve is that there is no trade-off between
inflation and unemployment in the long-run.
128. The long-run Phillips Curve is essentially a horizontal line at the economy’s natural rate
of inflation.
129. The policy implication of the long-run Phillips Curve is that, while stimulative policies
may work to reduce unemployment in the short run, the only effect of such policies in the
long run is to raise inflation.
130. Based on the long-run Phillips Curve, any rate of inflation is compatible in the long run
with the natural rate of unemployment.
Chapter 18 – Extending the Analysis of Aggregate Supply
131. The adjustment mechanism that brings the economy to its long-run aggregate supply has
to do with inflation-expectations, whereas the adjustment to the long-run Phillips curve has to
do with wage flexibility.
132. Supply-side economists contend that aggregate supply is the relevant policy factor in
influencing the price level and real output in an economy.
133. Supply-side economists recommend higher marginal tax rates to increase aggregate
supply and real output.
134. The Laffer Curve indicates that lower tax rates will increase output.
Chapter 18 – Extending the Analysis of Aggregate Supply
135. The Laffer Curve suggests that within a certain range, lower tax rates will increase tax
revenues.
136. 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.
137. The experience of the U.S. with supply-side policies is that tax cuts affect the economy
more on the demand side rather than the supply side.