Chapter 27 - Bringing in the Supply Side: Unemployment or Inflation

When the expenditure schedule is too low, the result is a(n) \___ gap

recessionary

Recessionary gap arises when

a. inventory stock falls.

b. government spending increases.

c. when the general price level increases.

d. there is less spending than desired.

d. there is less spending than desired

When the expenditure schedule is too high, the result is a(n) ___ gap

inflationary

In spite of the fact that unemployment rates were at a 30-year low in 1996-2000, the United States economy also experienced

a. declining inflation.

b. balance of payments surpluses.

c. large budget deficits.

d. low growth.

a. declining inflation

To calculate a firm's per unit of output profit, it is necessary to subtract

a. price from cost per unit.

b. price from resource costs.

c. cost per unit from product price.

d. cost per unit from cost of resources.

c. cost per unit from product price

The aggregate supply curve is

a. generally flatter as the level of resource use rises.

b. never vertical, even at full employment.

c. relatively flat at low levels of output.

d. relatively steep at low levels of output.

c. relatively flat at low levels of output

The aggregate supply curve normally

a. slopes downward and to the right due to higher resource prices.

b. has a horizontal slope equal to zero.

c. is very steep in the lower portion and flatter in the upper portion.

d. slopes upward to the right due to short-run fixed costs of production.

d. slopes upward to the right due to short-run fixed costs of production

As the U.S. labor force grows and the nation's capital stock is augmented by investment, the aggregate supply curve\___

shifts outward

The aggregate supply curve slopes

a. downward because firms can sell more at lower prices.

b. downward because firms can hire more workers at lower prices.

c. upward because firms want to hire more workers at higher wage levels.

d. upward because firms can hire labor at fixed wages for short-run periods.

d. upward because firms can hire labor at fixed wages for short-run periods.

The aggregate supply curve is

a. a schedule showing the relationship between the price level and the quantity of real GDP supplied.

b. usually upward sloping.

c. relatively flat at low levels of resource utilization.

d. All of the above are correct.

d. All of the above are correct.

If profit per unit equals (price - cost per unit) and costs are temporarily fixed, then the aggregate supply curve will have

a. a basic "U" shape.

b. a negative slope.

c. a positive slope.

d. All of the above could be correct.

c. a positive slope.

A statement issued by the president's economic advisors stating that growth can continue without price increases indicates that they believe the relevant aggregate supply curve is ___

horizontal

An increase in wages will cause the aggregate supply curve to ____

shift inward

A company succumbs to a wage increase demand without any changes in the productivity of labor, price of the product, and the total output sold. Which of the following would happen?

a. Total revenue of the company will fall.

b. Investment by the company will increase.

c. Profit per unit of the product will fall.

d. Average profit per unit will increase.

c. Profit per unit of the product will fall.

The slope of the aggregate supply curve increases as output increases because

a. the cost of resource-use increases as potential is reached.

b. consumers are willing to pay more as output expands.

c. firms substitute capital for labor as prices increase.

d. firms substitute capital for labor as capacity is reached.

a. the cost of resource-use increases as potential is reached. ( not c because capital and labor aren't substitutes)

Aggregate supply can be thought of as

a. a fixed amount of output.

b. unrelated to the price level.

c. a schedule of output at different price levels.

d. the volume of goods at the ends of the production possibilities curve.

c. a schedule of output at different price levels.

If the price level rises, what will happen to aggregate supply?

a. It will shift outward.

b. It will shift inward.

c. Nothing.

d. It will get steeper.

e. It will get flatter.

c. Nothing. (something else has to happen too)

The aggregate supply curve shows the relationship between ____ and ____, holding all other factors constant.

a. price level; quantity of real GDP

b. supplied price level; supply of nominal GDP

c. nominal GDP; price level of real GDP

d. price level; amount of nominal GDP supplied

a. price level; quantity of real GDP

If the price level rises, what will happen to the level of real GDP supplied?

a. It will usually decrease.

b. It will usually increase.

c. Nothing.

d. It will decrease at first and then increase.

b. It will usually increase. (direct)

If the price level decreases, what will happen to the level of real GDP supplied?

a. It will usually decrease.

b. It will usually increase.

c. Nothing.

d. It will decrease at first and then increase.

a. It will usually decrease. (direct)

The concept of aggregate supply is a

a. fixed number.

b. schedule.

c. predetermined amount of output.

d. All of the above are correct.

b. schedule.

Aggregate supply is defined as

a. how much the economy can produce at zero unemployment.

b. an amount of output the economy will produce at full employment.

c. the relationship between the expenditures schedule and the leakages schedule.

d. the relationship between the price level and the quantity of real GDP supplied.

d. the relationship between the price level and the quantity of real GDP supplied.

The relationship between the price level and the quantity of real GDP supplied is

a. full employment output.

b. inflationary or recessionary gap.

c. aggregate supply.

d. supply-side equilibrium.

c. aggregate supply.

The main reason that firms adjust their output when the price level changes is that

a. uncertainty causes a drop in output.

b. taxes cause a supply-side reaction.

c. their profit margins change.

d. increased risks lead to a change in output.

c. their profit margins change.

The aggregate supply curve slopes upward because firms

a. seek to maximize profits and output.

b. normally can purchase inputs at fixed prices.

c. employ technology, which is always fixed.

d. purchase inputs whose prices rise as output rises.

b. normally can purchase inputs at fixed prices.

The OPEC production cuts of 1999-2000 increased energy prices and caused the aggregate supply curve to

a. shift outward.

b. shift inward.

c. become flatter.

d. become steeper.

b. shift inward.

If scientific research produces a technological breakthrough in the production of computer memory, then

a. business costs will increase, profits will fall, and production will decrease.

b. business costs will fall, but profits will also fall, and production will decrease.

c. business costs will fall, profits will improve, and production will increase.

d. profits will increase, allowing businesses to cut back production.

c. business costs will fall, profits will improve, and production will increase.

An increase in the money wage rate will cause the aggregate supply curve to shift

a. outward, which means the quantity supplied at any price level decreases.

b. outward, which means the quantity supplied at any price level increases.

c. inward, which means the quantity supplied at any price level increases.

d. inward, which means the quantity supplied at any price level decreases.

d. inward, which means the quantity supplied at any price level decreases.

Increases in the availability of natural resources will affect the aggregate supply curve such that it

a. shifts inward and becomes flatter.

b. shifts inward.

c. shifts outward.

d. becomes flatter.

e. becomes steeper.

c. shifts outward.

If money wages increase, the most likely result is a(n)

a. increase in aggregate supply.

b. decrease in aggregate supply.

c. steeper aggregate supply curve.

d. flatter aggregate supply curve.

b. decrease in aggregate supply.

The investment and capital spending boom of the late 1990s most likely resulted in a(n)

a. increase in aggregate supply.

b. decrease in aggregate supply.

c. steeper aggregate supply curve.

d. flatter aggregate supply curve.

a. increase in aggregate supply.

At levels of output close to full employment, the aggregate supply curve is probably

a. very flat.

b. very steep.

c. sloped downward.

d. perfectly elastic.

b. very steep.

The price of imported oil decreased in 2001. How did this affect the aggregate supply curve?

a. It became steeper.

b. It became flatter.

c. It shifted inward.

d. It shifted outward.

d. It shifted outward.

Educational reforms that result in improved reading and math skills of high school graduates as they enter the labor force would do what to the aggregate supply curve?

a. Shift it outward.

b. Shift it inward.

c. Move the economy up along the curve.

d. Move the economy down along the curve.

a. Shift it outward.

Many economists are in favor of increased immigration of adult foreigners who possess high levels of skills and education. Why?

a. Economists are very caring individuals.

b. Economists believe this is a way to increase understanding among different ethnic groups.

c. Economists believe foreigners will work cheaper.

d. Economists believe this will increase aggregate supply.

d. Economists believe this will increase aggregate supply.

In response to the demands of environmentalists, large sections of timberlands are put off limits to logging. What effect will this have on the aggregate supply curve?

a. Shift it outward.

b. Shift it inward.

c. Move the economy up along the curve.

d. Move the economy down along the curve.

b. Shift it inward.

The aggregate demand and aggregate supply curve intersect

a. at potential GDP.

b. below potential GDP.

c. above potential GDP.

d. at a point which may or may not be equal to potential GDP.

d. at a point which may or may not be equal to potential GDP.

In response to the demands of environmentalists, large sections of timberlands are put off limits to logging. What effect will this have on the aggregate supply curve?

a. Shift it outward.

b. Shift it inward.

c. Move the economy up along the curve.

d. Move the economy down along the curve.

b. Shift it inward.

The concept of aggregate supply refers to a

a. fixed number of output.

b. list of products demanded.

c. schedule of output.

d. schedule of production costs.

c. schedule of output.

What does inflation do to the value of the oversimplified multiplier?

a. Inflation increases the value of the multiplier above the value of the oversimplified formula.

b. Inflation does not change the value of the multiplier.

c. Inflation decreases the value of the multiplier below the value of the oversimplified formula.

d. Inflation increases the value of the multiplier unless the level of unemployment also rises.

c. Inflation decreases the value of the multiplier below the value of the oversimplified formula.

The largest multiplier effect when slope is ___

horizontal

One reason the oversimplified multiplier is incorrect is that inflation

a. increases the multiplier by increasing investment spending.

b. increases the multiplier by increasing consumer spending.

c. decreases the multiplier by increasing net exports.

d. decreases the multiplier by decreasing consumer spending.

d. decreases the multiplier by decreasing consumer spending.

Assume an economy with an upward-sloping aggregate supply curve and an MPC of .80. An increase in investment spending of $50 billion will most likely increase total income by

a. $200 billion.

b. $40 billion.

c. more than $200 billion.

d. more than $50 billion but less than $250 billion.

d. more than $50 billion but less than $250 billion.

The federal government increases spending by $50 billion and the main effect is an increase in the price level. It must be true that the economy is operating on the

a. horizontal portion of the aggregate demand curve.

b. horizontal portion of the aggregate supply curve.

c. vertical portion of the aggregate supply curve.

d. vertical portion of the aggregate demand curve.

c. vertical portion of the aggregate supply curve.

As long as the aggregate supply curve is upward sloping, an increase in aggregate demand will increase

a. real wealth.

b. price levels.

c. unemployment.

d. net exports.

b. price levels.

When inflation occurs, net exports will

a. increase as imports decrease.

b. increase as exports increase.

c. decrease as imports decrease.

d. decrease as imports increase.

d. decrease as imports increase.

If the MPC of an economy is .90 and the economy has a horizontal aggregate supply curve, then an increase in investment spending of $50 million will increase total income by

a. $50 million.

b. more than $50 million but less than $500 million.

c. $500 million.

d. more than $500 million.

c. $500 million.

The reason why inflation reduces the value of the multiplier is that part of the change in demand is

a. absorbed by price changes.

b. saved rather than spent.

c. matched by changes in supply.

d. matched by changes in income.

a. absorbed by price changes. (demand goes down, but made up for because the prices go up)

In Figure 10-3, we would expect the aggregate supply curve in graph (b) to eventually

a. shift to the right, eliminating the recessionary gap.

b. shift to the left, eliminating the inflationary gap.

c. become steeper in the upper portion, eliminating the inflationary gap.

d. become flatter in the upper portion, eliminating the recessionary gap.

b. shift to the left, eliminating the inflationary gap.

When the economy represented in Figure 10-3 has completed the self-correcting adjustment process, the expenditure line in graph (a) will be ___

lower

What is the principal reason that economists give for the existence of deflationary and inflationary gaps?Wages are ___ in the ___ -run.

fixed/short

In Figure 10-4, if full employment occurs at 5,000 and the price level is currently 130, then we can expect the

a. aggregate supply curve to shift to the left until a new equilibrium is established at an output level of 4,000.

b. aggregate demand curve to shift to the right until a new equilibrium is established at an output level of 6,000.

c. the price level to fall to 110.

d. aggregate demand to shift to the left and aggregate supply to shift to the right until the price level reaches 130.

c. the price level to fall to 110.

In Figure 10-4, if full employment occurs at an output level of 4,000 and the economy is currently at an output level of 5,000 then we can expect a(n)

a. increase in autonomous consumer spending that shifts the aggregate demand curve to the left.

b. increase in wages that will shift the aggregate supply curve to the left.

c. decrease in investment spending that shifts the aggregate demand curve to the left.

d. decrease in wages that will shift the aggregate supply curve to the left.

b. increase in wages that will shift the aggregate supply curve to the left.

A recessionary gap exists when

a. real GDP exceeds nominal GDP.

b. nominal GDP exceeds real GDP.

c. real GDP exceeds potential GDP.

d. potential GDP exceeds real GDP.

d. potential GDP exceeds real GDP.

Recessionary gaps usually lead to ___ unemployment

cyclical

A recession can be expected to reduce inflation in the economy if the recession is caused by a(n)

a. increase in aggregate demand.

b. increase in aggregate supply.

c. decrease in aggregate demand.

d. decrease in aggregate supply.

c. decrease in aggregate demand.

One complication in the process of reducing inflation by creating recessions is that the price level

a. adjusts more quickly to recessionary gaps than to inflationary gaps.

b. does not apply as it does in inflationary gaps.

c. always rises.

d. rarely falls.

d. rarely falls.

If the price level does not fall or only falls very slowly, then the result will be a prolonged period of

a. inflation whenever supply increases.

b. production below potential GDP.

c. production above potential GDP.

d. rapid price increases when demand changes.

b. production below potential GDP.

When equilibrium GDP is below potential GDP, jobs are

a. plentiful and unemployment is low.

b. plentiful and unemployment is high.

c. scarce and unemployment is high.

d. scarce and unemployment is low.

b. plentiful and unemployment is high.

Most economists agree that the economy will adjust to a recessionary gap, but the adjustment process

a. is rapid and destabilizing.

b. is moderately quick, but not as rapid as necessary.

c. takes place solely on the supply side.

d. is very slow.

d. is very slow.

The post-World War II record shows that recessionary gaps may be long-lasting because ___ tends not to occur.

deflation

In Figure 10-6, which graph best illustrates the effect of the beginning of the Iraq war in 2003?

a. (1)

b. (2)

c. (3)

d. (4)

b. (2)

In Figure 10-6, which graph best illustrates an autonomous increase in consumption spending?

1

The typical result of an adverse supply shock is

a. falling output accompanied by accelerating inflation.

b. falling output accompanied by decelerating inflation.

c. rising output accompanied by accelerating inflation.

d. rising output accompanied by decelerating inflation.

a. falling output accompanied by accelerating inflation. (double whammy)

A shift outward of the aggregate supply curve could be caused by

a. higher import prices.

b. lower import prices.

c. energy shortages.

d. rising wage rates.

b. lower import prices.

How are aggregate supply and stagflation related?

a. Stagflation usually causes an adverse shift in aggregate supply.

b. An adverse supply shift usually causes stagflation.

c. Stagflation only follows inflation, with no relation to aggregate supply.

b. An adverse supply shift usually causes stagflation.

The years 2002 through 2007 can be described as a period of

a. falling output accompanied by increasing inflation.

b. falling output accompanied by decreasing inflation.

c. rising output accompanied by increasing inflation.

d. rising output accompanied by decreasing inflation.

c. rising output accompanied by increasing inflation.

Refer to Figure 10-7. Which of the diagrams in Figure 10-7 represents a decrease in consumer spending combined with a positive supply shock?

a. Panels (A) & (B)

b. Panels (C) & (D)

c. Panels (A) & (C)

d. Panels (B) & (D)

a. Panels (A) & (B)

Which of the panels in Figure 10-7 shows an economic recession caused by primarily by a change aggregate demand?

a. Panel (A)

b. Panel (B)

c. Panel (C)

d. Panel (D)

a. Panel (A)

Figure 10-8 describes which of the following periods in the U.S.?

a. 1930s

b. 1973-1975

c. late 1990s

d. 2007-2009

b. 1973-1975

Figure 10-8 illustrates a period of

a. low unemployment and high inflation.

b. low unemployment and low inflation.

c. high unemployment and high inflation.

d. high unemployment and low inflation.

c. high unemployment and high inflation.

Figure 10-9 describes which of the following periods in the U.S.?

a. 1930s

b. 1973-1975

c. late 1990s

d. 2007-2009

c. late 1990s