1. As aggregate demand falls, price ____ and quantity produced _____. They are _______ to each other.
Arrange: Increases; Decreases; Proportional; Inversely proportional

2. The “natural rate of unemployment” refers to:
- The minimum unemployment rate consistent with steady inflation
- The unemployment rate that must be achieved in order to reduce inflation
- The unemployment rate associated with an economy that has failed to yet reach its full level of industrialization

3. As interest rates fall, bond prices will _____.
- Fall
- Rise
- Remain constant
- Cannot be determined without further information

4. The natural rate of unemployment
1. Is the lowest unemployment rate an economy can sustain without causing inflation
2. Is projected in the Monetarists' Phillip's Curve theory
3. The average rate of unemployed persons during the course of one year
4. 1 and 2 only
5. All of the above

5. Suppose the inflation rate exceeds the rate of growth in income. That would mean that purchasing power is:
Falling
Rising
Staying the sam

6. Cost-push inflation is caused by:
“Too much money chasing too few goods.”
Supply-side shocks like drought and oil price hikes.
A rise in the savings rate

7. Define the inertial rate of inflation.
Expectations consumers and firms have about future inflation
Inflation that persists at the same rate over time until it encounters a demand or supply side shock
Play an important role in determining the wage level
Core rate of inflation

8. An increase in the tax rate, as depicted by the Laffer Curve, will result in
A growth in real GDP
A fall in tax revenue
Increased worker productivity
Steady economic growth

9. According to the theory of the Phillips Curve, what happens to prices when unemployment rises?
They fall
They rise
They stay the same

10. Which statement is true?
Expansionary policies stimulate a recessionary economy – but cause inflation.
Contractionary policies fight inflation– but can trigger unemployment and recession.
Both
Neither

11. A Keynesian stimulus in the Classical range causes
Cost-push inflation
An increase in real output
Demand-pull inflation
All of the above

12. Fiat or paper money is capable of holding its value unlike commodity money whose face value falls when inflation intensifies.
True
False

13. The “core or inertial” rate of inflation is defined as:
The inflation that exists all a time
Inflation that tends to persist at the same rate until a demand or supply side shock changes things
The inflation that exists before Keynesian stimulus

14. The Phillips curve was created by A.W. Phillips as he studied years of unemployment data and wages within the UK. After analyzing the statistics, he determined that with increased GDP growth
1. Demand for goods and services rises
2. Production levels fall as a result of a shortage of supplies
3. Inflation falls
4. The rate of employment increases
5. Both 3 and 4

15. Describe the effects of a fiscal stimulus during a recession to drive down the natural rate of unemployment.
1. The economy will experience a brief growth in real GDP
2. The price of goods will rise
3. Economic growth will cease and only a higher inflation rate will remain
4. The unemployment rate will return to its natural rate at a higher price level
5. All of the above
6. Both 1 and 4
7. 1, 3, and 4

16. Name the three ranges of the economy.
Keynesian, Intermediate, Classical
Development, Rapid growth, Decline
Recessionary trough, Growth, Expansionary peak

17. The Laffer Curve is backward bending, showcasing that the more people are taxed the less people will work. The result will be a fall in total tax revenue.
True
False

18. What happens when the inflation rate exceeds the rate of wage growth?
Wages are increasing
Purchasing power is declining
Real, inflation-adjusted income is rising
Consumer demand has surpassed available supply

19. Stagflation is defined as:
Simultaneous unemployment and wage declines
Simultaneous inflation and wage declines
Simultaneous unemployment and inflation

20. Which governmental policy is capable of rectifying demand-pull inflation?
1. Expansionary fiscal policy
2. Tax policy
3. Regulatory reforms
4. Contractionary monetary policy
5. 1 and 4 only

21. In 2011, the average inflation rate was approximately 3% while in 2012 it was 2%. Using this data to predict future events is an example of
Forecasting
Adaptive expectations
Rational expectations
Inflationary expectations

22. The theory of rational expectations, the ability to apply past experiences to current assumptions, was developed by
1. Robert Barro of Harvard University
2. Robert Lucas of the University of Chicago
3. Thomas Sargent of Stanford University
4. All of the above
5. 1 and 2 only
6. 2 and 3 only

23. According to Keynesians, what course of action should be taken to end an inflationary spiral?
Implementing a tax policy
Inducing a recession
Price and wage controls

1. As aggregate demand falls, price ____ and quantity produced ____...

1. As aggregate demand falls, price and quantity produced ...