Question 1

When actual inflation exceeds expected inflation,

Accepted Answer

A)   unemployment is equal to the natural rate of unemployment.
B)   people will reduce their expectations of inflation in the future.
C)   unemployment is greater than the natural rate of unemployment.
D)   unemployment is less than the natural rate of unemployment.E) A) and B)
F) B) and D)

Question 2

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation. If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Accepted Answer

A)   5 per cent.
B)   2 per cent.
C)   12 per cent.
D)   None of the above is correct.E) A) and D)
F) All of the above

Question 3

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Accepted Answer

A) True 
 B)False

Question 4

In the long run, the unemployment rate is independent of inflation and the Phillips curve is vertical at the natural rate of unemployment.

Accepted Answer

A) True 
 B)False

Question 5

If people expect less inflation in the future, then the

Accepted Answer

A)   long-run Phillips curve will become steeper.
B)   long-run Phillips curve will become flatter.
C)   short-run Phillips curve will become steeper.
D)   short-run Phillips curve will shift down and to the left.E) A) and D)
F) B) and C)

Question 6

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Accepted Answer

A)   reduce inflation with little or no increase in unemployment.
B)   increase inflation but it would decrease unemployment by an unusually large amount.
C)   increase inflation with little or no decrease in unemployment.
D)   reduce inflation but it would increase unemployment by an unusually large amount.E) A) and C)
F) B) and C)

Question 7

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Accepted Answer

A downward-sloping Phillips curve implie...

Question 8

Which of the following would shift the long-run Phillips curve to the right?

Accepted Answer

A)   An increase in the minimum wage
B)   An increase in expected inflation
C)   An increase in the price of foreign oil
D)   An increase in aggregate demandE) B) and D)
F) C) and D)

Question 9

For centuries economists have puzzled over the relationship between a nation's money supply and its economic prosperity. In 1752, __________ suggested that if the money supply is increased when an economy is below full employment, spending will increase, which in turn creates economic expansion.

Accepted Answer

A)   Arthur Brown.
B)   Jan Tinbergen.
C)   Karl Marx.
D)   David Hume.E) B) and D)
F) A) and B) D

Question 10

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 11

A decrease in the price of foreign oil

Accepted Answer

A)   shifts the short-run Phillips curve downward, and makes the unemployment inflation trade-off less favourable.
B)   shifts the short-run Phillips curve upward, and makes the unemployment inflation trade-off less favourable.
C)   shifts the short-run Phillips curve upward, and makes the unemployment inflation trade-off more favourable.
D)   shifts the short-run Phillips curve downward, and makes the unemployment inflation trade-off more favourable.E) B) and C)
F) A) and C) D

Question 12

Explain how the effects of a shift in the aggregate demand curve consistent with the Phillips curve.

Accepted Answer

Consider what happens when the aggregate...

Question 13

Which of the following will reduce the price level and increase real output in the long run?

Accepted Answer

A)   an increase in the money supply
B)   an increase in wage rates
C)   a decrease in the money supply
D)   technical progressE) A) and C)
F) C) and D)

Question 14

What did Milton Friedman and Edmund Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behaviour of the economy in the late 1960s and the 1970s prove them wrong?

Accepted Answer

Friedman and Phelps predicted that, over time, people would come to expect higher inflation, so the short-run Phillips curve would shift right. When this happened, unemployment would go back to its natural rate, but inflation would be higher. The behaviour of the economy in the late 1960s and the 1970's was consistent with their theory since inflation rose but unemployment did not remain low.

Question 15

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

Accepted Answer

A)   decreases growth.
B)   decreases unemployment.
C)   increases unemployment.
D)   decreases inflation.E) A) and D)
F) B) and C)

Question 16

If a country's policy makers were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be

Accepted Answer

A)   an increase in the level of output.
B)   a decrease in the unemployment rate.
C)   an increase in the rate of inflation.
D)   all of these answers.E) A) and B)
F) B) and D)

Question 17

A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.

Accepted Answer

A) True 
 B)False

Question 18

If a central bank decreases the money supply, then

Accepted Answer

A)   prices, output, and unemployment rise.
B)   prices and output rise and unemployment falls.
C)   prices rise and output and unemployment fall.
D)   prices and output fall and unemployment rises.E) All of the above
F) B) and D)

Question 19

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Accepted Answer

A)   the Phillips curve was upward sloping, not downward sloping as first thought.
B)   there was no trade-off between inflation and unemployment in the long run.
C)   the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation.
D)   the aggregate supply curve actually sloped downward because price levels fell when real GDP rose.E) A) and B)
F) B) and C)

Question 20

Which of the following would tend to shorten recessions associated with the use of anti-inflation policies?

Accepted Answer

A)   People adjust their expectations of inflation slowly.
B)   People believe policy announcements made by economic policy makers.
C)   The short-run Phillips curve does not shift immediately.
D)   All of the above are correct.E) C) and D)
F) All of the above

Exam 35: The Short-Run Trade-Off Between Inflation and Unemployment

When actual inflation exceeds expected inflation,

Correct Answer
verified

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation. If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Correct Answer
verified

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Correct Answer
verified

In the long run, the unemployment rate is independent of inflation and the Phillips curve is vertical at the natural rate of unemployment.

Correct Answer
verified

If people expect less inflation in the future, then the

Correct Answer
verified

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Correct Answer
verified

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Correct Answer
verified
A downward-sloping Phillips curve implie...
View Answer

Which of the following would shift the long-run Phillips curve to the right?

Correct Answer
verified

For centuries economists have puzzled over the relationship between a nation's money supply and its economic prosperity. In 1752, __________ suggested that if the money supply is increased when an economy is below full employment, spending will increase, which in turn creates economic expansion.

Correct Answer
verified
D

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Correct Answer
verified

A decrease in the price of foreign oil

Correct Answer
verified
D

Explain how the effects of a shift in the aggregate demand curve consistent with the Phillips curve.

Correct Answer
verified
Consider what happens when the aggregate...
View Answer

Which of the following will reduce the price level and increase real output in the long run?

Correct Answer
verified

What did Milton Friedman and Edmund Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behaviour of the economy in the late 1960s and the 1970s prove them wrong?

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

Correct Answer
verified

If a country's policy makers were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be

Correct Answer
verified

A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.

Correct Answer
verified

If a central bank decreases the money supply, then

Correct Answer
verified

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Correct Answer
verified

Which of the following would tend to shorten recessions associated with the use of anti-inflation policies?

Correct Answer
verified

Exam 35: The Short-Run Trade-Off Between Inflation and Unemployment

When actual inflation exceeds expected inflation,

Correct AnswerverifiedShow Answer

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation. If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Correct AnswerverifiedShow Answer

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Correct AnswerverifiedShow Answer

In the long run, the unemployment rate is independent of inflation and the Phillips curve is vertical at the natural rate of unemployment.

Correct AnswerverifiedShow Answer

If people expect less inflation in the future, then the

Correct AnswerverifiedShow Answer

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Correct AnswerverifiedShow Answer

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Correct AnswerverifiedA downward-sloping Phillips curve implie...View AnswerShow Answer

Which of the following would shift the long-run Phillips curve to the right?

Correct AnswerverifiedShow Answer

For centuries economists have puzzled over the relationship between a nation's money supply and its economic prosperity. In 1752, __________ suggested that if the money supply is increased when an economy is below full employment, spending will increase, which in turn creates economic expansion.

Correct AnswerverifiedD

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Correct AnswerverifiedShow Answer

A decrease in the price of foreign oil

Correct AnswerverifiedD

Explain how the effects of a shift in the aggregate demand curve consistent with the Phillips curve.

Correct AnswerverifiedConsider what happens when the aggregate...View AnswerShow Answer

Which of the following will reduce the price level and increase real output in the long run?

Correct AnswerverifiedShow Answer

What did Milton Friedman and Edmund Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behaviour of the economy in the late 1960s and the 1970s prove them wrong?

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

Correct AnswerverifiedShow Answer

If a country's policy makers were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be

Correct AnswerverifiedShow Answer

A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.

Correct AnswerverifiedShow Answer

If a central bank decreases the money supply, then

Correct AnswerverifiedShow Answer

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Correct AnswerverifiedShow Answer

Which of the following would tend to shorten recessions associated with the use of anti-inflation policies?

Correct AnswerverifiedShow Answer

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A downward-sloping Phillips curve implie...
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D

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D

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Consider what happens when the aggregate...
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