AP ECONOMICS CHAPTER 16 STUDY GUIDE
6. In Graph B above, assume that the economy is
initially in equilibrium at point x1 and that there is an
increase in the price level from P1 to P2. In the long
run, this change will lead to:
A) lower nominal wages and a shift in the short-run
aggregate supply curve from AS1 to AS2.
B) higher nominal wages and a shift in the shortrun aggregate supply curve from AS1 to AS2.
C) lower nominal wages and a movement from
equilibrium point x1 to equilibrium point x2.
D) higher nominal wages and a movement from
equilibrium point x1 to equilibrium point x2.
1. The short run in macroeconomics 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. The economy enters the long-run once:
A) nominal wages become real wages.
B) real wages become nominal wages.
C) sufficient time has elapsed for wage contracts to
expire and nominal wage adjustments to occur.
D) sufficient time has elapsed for real GDP to
increase and unemployment to decrease.
7. With demand-pull inflation in the extended AD-AS
model, there is:
A) a decrease in aggregate demand that eventually
increases nominal wages and causes a decrease
in the short-run aggregate supply curve.
B) an increase in aggregate demand that eventually
increases nominal wages and causes an increase
in the short-run aggregate supply curve.
C) an increase in aggregate demand that eventually
decreases nominal wages and causes a decrease
in the short-run aggregate supply curve.
D) an increase in aggregate demand that eventually
increases nominal wages and causes a decrease
in the short-run aggregate supply curve.
3. Assume that initially your nominal wage was $16 an
hour and the price index was 100. If the price level
increases to 107, then your:
A) nominal wage has decreased to $14.95.
B) nominal wage has increased to $17.12.
C) real wage has decreased to $14.95.
D) real wage has increased to $17.12.
4. A graph of the long-run aggregate supply curve is:
A) downsloping while a graph of the short-run
aggregate supply is upsloping.
B) upsloping while a graph of the short-run
aggregate supply is downsloping.
C) vertical while a graph of the short-run aggregate
supply is upsloping.
D) vertical while a graph of the short-run aggregate
supply is downsloping.
8. Demand-pull inflation in the short-run increases the
price level and:
A) real wages. B) real output.
C) unemployment. D) nominal wages.
9. Inflation is most likely to result from a(n):
A) increase in aggregate demand or aggregate
supply.
B) decrease in aggregate demand or aggregate
supply.
C) increase in aggregate demand or a decrease in
aggregate supply.
D) decrease in aggregate demand or an increase in
aggregate supply.
10. An inflationary spiral is likely to occur when
government:
A) counters cost-push inflation with a stimulative
fiscal policy or monetary policy.
B) adopts a hands-off approach to cost-push
inflation.
C) increases aggregate supply by lowering nominal
wages.
D) increases aggregate demand by raising nominal
wages.
5. Refer to the above graphs. The long-run aggregate
supply is represented by:
A) x1, x2, and x3 in Graph A.
B) x1, x2, and x3 in Graph B.
C) z1, x1, and y1 in Graph B.
D) z1, x2, and x1 in Graph B.
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11. Refer to the above graph. Given 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 by a shift from:
A) AS1 to AS3. B) AD1 to AD2. C) AS1 to
AS2. D) AD2 to AD1.
14. Refer to the above graphs. Assume that in graph 1
the economy is in initial equilibrium where AD1 and
AS intersect and assume in graph 2 that the economy
is initially at point C. In graph 1, a shift of AD1 to
AD2 compared to a shift from AD1 to AD3 would
most likely be associated in graph 2 with a shift from
point C to:
A) A compared to a shift from point C to point B.
B) B compared to a shift from point C to point A.
C) D compared to a shift from point C to point E.
D) E compared to a shift from point C to point D.
12. Refer to the above graph. Assume that the economy
is at equilibrium at AD1 and AS1 and then is hit with
both demand-pull and cost-push inflation. If this
occurs, then, in the short run:
A) AD1 will shift to AD2, AS2 will shift to AS3,
the price level will be at P2, and output will be
at Q2.
B) AS1 will shift to AS3, AD2 will shift to AD1,
the price level will be at P3, and output will be
at Q3.
C) AD1 will shift to AD2, AS1 will shift to AS2,
the price level will be at P2, and output will be
at Q2.
D) AD1 will shift to AD2, AS1 will shift to AS2,
the price level will be at P3, and output will be
at Q1.
15. Which event probably contributed to the stagflation
of the 1970s?
A) worldwide agricultural surpluses
B) an improvement in productivity
C) an appreciation in the dollar
D) a rise the price of oil
13. The traditional Phillips Curve is based on the idea
that with a constant short-run aggregate supply curve,
the larger the increase in aggregate demand:
A) the less the increase in real output and the higher
the rate of inflation.
B) the greater the increase in real output and the
higher the rate of inflation.
C) the greater the increase in real output and the
lower the rate of inflation.
D) the less the increase in real output and the lower
the rate of inflation.
16. Refer to the above graph. Assume the economy is at
the initial position of B1. An increase in aggregate
demand will tend to:
A) temporarily shift the economy to point B2.
B) temporarily shift the economy to point C1.
C) permanently shift the economy to point C1.
D) have no effect in shifting the economy from
point B1.
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17. Refer to the above graph. If the economy moves
from point B3 to point C3 because of an increase in
aggregate demand, then:
A) nominal wages will rise, reducing profits and
thereby negating the short-run stimulus to
production and employment so that the economy
moves from C3 to B4.
B) real wages will rise, reducing profits and thereby
negating the short-run stimulus to production
and employment so that the economy moves
from C3 to B3.
C) nominal wages will rise, reducing profits and
thereby negating the short-run stimulus to
production and employment so that the economy
moves from C3 to B3.
D) nominal wages will rise, reducing profits and
thereby negating the short-run stimulus to
production and employment so that the economy
moves from C3 to C2.
C) the natural rate of unemployment.
D) the efficiency trade-off between unemployment
and inflation.
23. The long-run Phillips Curve is vertical at:
A) price level.
B) the natural rate of unemployment.
C) every level of real GDP.
D) the rate of maximum taxation.
24. The short-run Phillips Curve would indicate that
when the actual rate of inflation is lower than the
expected rate of inflation, the:
A) unemployment rate will decrease.
B) unemployment rate will increase.
C) expected rate of inflation will decrease.
D) actual rate of inflation will decrease.
25. Disinflation is best described as a:
A) decline in the natural rate of unemployment.
B) fall in the value of the dollar.
C) reduction in the money supply.
D) decrease in the rate of inflation.
18. Refer to the above graph. The full-employment
unemployment rate in this economy would be:
A) 5 percent. B) 6 percent. C) 7 percent.
D) 5-6 percent.
26. Inflation can be explained based on the Phillips
Curve analysis that when the actual rate of inflation is
greater than the expected rate, the unemployment rate
will:
A) rise temporarily, but decreases in nominal wages
will decrease unemployment to its natural rate
and bring the expected and actual rates of
inflation into balance.
B) rise temporarily, but increases in nominal wages
will increase unemployment to its natural rate
and bring the expected and actual rates of
inflation into balance.
C) fall temporarily, but increases in nominal wages
will increase unemployment to its natural rate
and bring the expected and actual rates of
inflation into balance.
D) fall temporarily, but decreases in nominal wages
will decrease unemployment to its natural rate
and bring the actual and expected rates of
inflation into balance.
19. Refer to the above graph. The long-run relationship
between the rate of inflation and the unemployment
rate is represented by:
A) the zigzag line, B1C1B2C2B3C3B4.
B) a line connecting points C1C2C3.
C) a line connecting points B1B2B3B4.
D) a line connecting points B1 and C1.
20. Refer to the above graph. What events would tend to
move the economy from point B2 to C2?
A) a tight monetary policy
B) a contractionary fiscal policy
C) an increase in aggregate demand
D) an increase in aggregate supply
21. Refer to the above graph. The economy is at point
B2, and aggregate demand increases. In the short
run, the economy will:
A) stay at point B2.
B) move to point C2 and in the long run to B3.
C) move to point B3 and in the long run to C2.
D) move to point B1 and in the long run to B1.
27. Which is a basic proposition of supply-side
economics?
A) The Federal Reserve should target the Federal
funds rate rather than the money supply.
B) Tax increases on business reduce productivity
and output and increase the price level.
C) Low marginal tax rates reduce incentives to
work, saving, and investment.
D) Transfer payments increase incentives to work.
22. In the long run, stability for the economy is achieved
only at:
A) a high rate of profit.
B) the natural rate of inflation.
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28. One of the central ideas in supply-side economics is:
A) disinflation. B) stagflation.
C) the Laffer Curve. D) the Phillips Curve.
31. A senator states: "We need to increase the productive
capacity of the United States by cutting taxes and
increasing incentives to work 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:
A) rather than cutting taxes there should be a
decrease in government spending to address the
problem.
B) rather than cutting taxes, monetary policy should
become tighter to control the inflation rate.
C) cutting tax rates will probably have a greater
impact on aggregate demand than it will on
aggregate supply.
D) cutting taxes will probably have a greater impact
on aggregate supply than it will on aggregate
demand.
29. The above diagram describes the notion that as tax:
A) revenues increase from zero to 100 percent, tax
rates will increase from zero to some maximum
level and then decline to zero.
B) rates increase from zero to 100 percent, tax
revenue will increase from zero to some
maximum level and decline to zero.
C) rates decrease from 100 to zero percent, tax
revenue will decrease from 100 percent to a
maximum level.
D) rates increase from zero to 100 percent, tax
revenue will increase from zero to a maximum
level.
30. Refer to the above diagram. Critics of supply-side
economics would argue that tax rates are currently
between:
A) b and d and that a decrease in tax rates will
decrease tax revenues.
B) 0 and b and that a decrease in tax rates will
decrease tax revenues.
C) 0 and b and that a decrease in tax rates will
increase tax revenues.
D) b and d and that a decrease in tax rates will
increase tax revenues.
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Answer Key -- SG16TB2
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31.
C
C
C
C
C
B
D
B
C
A
B
D
B
B
D
B
A
C
C
C
B
C
B
B
D
C
B
C
B
B
C
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