1. What is the effect of a tax increase on the equilibrium level of aggregate output and prices in the economy? A: Both the level of output and the price level increase. B: Both the level of output and the price level decrease. C: The level of output decreases and the price level increases. D: The level of output increases and the price level decreases.

2. The natural rate of unemployment is? A:fixed at about 3 percent. B: the rate of unemployment that guarantees that most people who want to work have jobs. C: the rate of unemployment associated with the highest possible level of output in the economy. D: the rate of unemployment associated with a stable rate of inflation.

3. Which of the following statements best describes the relationship between unemployment and inflation? A: The higher the rate of inflation, the higher the rate of unemployment. B: The higher the rate of inflation, the lower the rate of unemployment. C: When inflation rises, unemployment first rises and then falls. D: There is no relationship between unemployment and inflation.