1.If factor markets were perfectly competitive, then full employment would be the normal condition and:

A) Inflation would always be zero

B) Output would rise steadily with price increases

C) There would never be any reason for prices to change

D) The AS curve would be horizontal

E) The AS curve would be vertical

2.The Keynesian AS curve differs from the AS curve of the classical economists, since Keynes:

A) Thought that nominal wages were flexible even when there was unemployment

B) Thought that labor markets worked smoothly to always establish full employment

C) Described the AS curve as completely vertical

D) Thought that nominal wages were rigid even when there was unemployment

E) Assumed that firms tried to exploit the work force by paying them substandard wages

3.The slope of the AS curve becomes steeper:

A) As wages become more flexible

B) As wages become more rigid

C) At output levels further away from potential output

D) As the economy approaches full employment

E) Both A) and D)

4.The AD curve has a negative slope since:

A) Firms only produce more if it is cheaper to do so

B) A price decrease increases real money balances, leading to lower interest rates and increased spending

C) Lower prices mean higher real wages so consumers can afford to buy more goods and services

D) Lower prices drive up the demand for goods since buyers fear future market shortages

E) Lower prices increase consumer confidence, which encourages spending

5.The natural rate of unemployment is:

A) Zero since everyone who is unemployed is so voluntarily

B) Rarely more than 3% of the labor force

C) The amount of unemployment caused by an average recession

D) The result of misguided government policy

E) Made up of both frictional and structural unemployment

CONCEPTUAL

1.Briefly explain why the AS-curve is upward sloping in the intermediate run.

2.How does the Keynesian aggregate supply curve differ from the classical one? Is one of the specifications more appropriate than the other? Explain, being careful to state the time horizon to which your answer applies.

3.Link output to unemployment. Hint: use Okun's Law

TECHNICAL QUESTION

If the government were to reduce income taxes, how would the reduction affect output and the price level in the short run? In the long run? Show how the aggregate supply and demand curves would be affected, in both cases.