Economics 252 – Revised Review Questions Chapter 16

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Figure 1

(1) In Figure 1, the initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. Demand pull inflation in the short run is best shown as:

(a) a shift of the aggregate demand curve from AD₁ to AD₂.

(b) a move from d to b to a.

(c) a move directly from d to a.

(d) a shift of the aggregate supply curve from AS₁ to AS₂.

(2) In Figure 1, the initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. In the long run, demand pull inflation is best shown as:

(a) a shift of aggregate demand from AD₁ to AD₂ followed by a shift of aggregate supply from AS₁ to AS₂.

(b) a move from d to b to a.

(c) a shift of aggregate supply from AS₁ to AS₂ followed by shift of aggregate demand from AD₁ to AD₂.

(d) a move from a to d.

(3) In Figure 1, the initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. In the long run, the aggregate supply curve is vertical in the diagram because:

(a) nominal wages and other input prices are assumed to be fixed.

(b) real output level Q_f is the potential level of output.

(c) price level increases produce perfectly offsetting changes in nominal wages and other input prices.

(d) higher than expected rates of actual inflation reduce real output only temporarily.

(4) In Figure 1, the initial aggregated demand curve is AD₁ and the initial aggregate supply curve is AS₁. Cost push inflation in the short run is best represented as a:

(a) leftward shift of the aggregate supply curve from AS₁ to AS₂.

(b) rightward shift of the aggregate demand curve from AD₁ to AD₂.

(c) a move from d to b to a.

(d) move from d directly to a.

Utilize Figure 2 to answer Questions (5), (6), (7), and (8). Figure 2

Unemployment Rate (%)

(5) In Figure 2, the curve in the graph is known as a:

(a) demand curve.

(b) Phillips curve.

(c) labor demand curve.

(d) production possibilities curve.

(6) In Figure 2, which of the following best describes the relationship shown by the curve?

(a) The demand for labor is large when the rate of inflation is small.

(b) When the rate of unemployment is high, the rate of inflation is high.

(c) The rate of inflation and the rate of unemployment are inversely related.

(d) The rate of inflation and the rate of unemployment are directly related.

(7) In Figure 2, a reduction in structural unemployment or bottleneck problems in labor markets will:

(a) shift this curve to the right.

(b) shift this curve to the left.

(c) move the economy southeast along the curve.

(d) move the economy northwest along the curve.

(8) In Figure 2, an increase in aggregate demand will:

(a) shift this curve to the right.

(b) shift this curve to the left.

(c) move this economy from a to b along the curve.

(d) move this economy from b to a along the curve.

Utilize Figure 3 to answer Questions (9) to (11). Figure 3

Annual Rate of Inflation (%)
	9 6 3
		0

(9) Figure 3 is the basis for explaining:

(a) the traditional Phillips curve.

(b) the long run Phillips curve.

(c) how central planning can make full employment and price stability compatible goals.

(d) new policies for eliminating unemployment.

(10) In Figure 3, the natural rate of unemployment for this economy is:

(a) 3 percent. (b) 4 percent. (c) 5 percent. (d) 6 percent.

(11) In Figure 3, assume the economy is initially at point b₁. With a time lag between price and nominal wage adjustments, an increase in aggregate demand will temporarily move the economy from:

(a) b₂ to b₁. (b) c₁ to b₂. (c) b₁ to c₁. (d) b₁ to b₂.

(12) In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price level changes is called the:

(a)long run (b)short run (c)immediate market period (d)very long run.

(13) The short run aggregate supply curve is upsloping because:

(a) of the interest rate effect.

(b) higher price levels create incentives to expand output when resource prices are unresponsive to price level changes.

(c) of the net export effect.

(d) higher price levels create an expectation among producers of still higher price levels.

(14) The traditional Phillips Curve suggests a tradeoff between:

(a) price level stability and income equality.

(b) the level of unemployment and price level stability.

(c) unemployment and income inequality.

(d) economic growth and full employment.

Utilize Figure 4 in answering Questions (15) to (17).

Figure 4

Inflation Rate (%)
	0
			Unemployment Rate (%)

(15) In Figure 4, point b on the short run Phillips Curve PC₁ represents a rate of:

(a) inflation below the natural rate.

(b) inflation above the natural rate.

(c) unemployment above the natural rate.

(d) unemployment below the natural rate.

(16) In Figure 4, point b would be explained by:

(a) the actual rate of inflation that exceeds the expected rate.

(b) an actual rate of inflation that is less than the expected rate.

(c) cost push inflation.

(d) an increase in long run aggregate supply.

(17) In Figure 4, point b would not be permanent because the:

(a) economy would move from b to a on PC₁.

(b) short run Phillips Curve would shift from PC₁ to PC₂ and unemployment would increase to the natural rate at c.

(c) economy would immediately move from b to a.

(d) economy would move from b to c, and then to a.