Question 1

One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that

Accepted Answer

A)   firms will be put in a position of competing more intensely for scarce resources.
B)   people will pay higher prices because competition among suppliers intensifies.
C)   workers will focus more directly on protecting their jobs.
D)   firms will refuse to shift higher labour costs along to consumers for fear of losing their markets.E) A) and B)
F) None of the above

Question 2

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

Accepted Answer

A) True 
 B)False

Question 3

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.

Accepted Answer

If unemployment is above its natural rat...

Question 4

An increase in expected inflation

Accepted Answer

A)   shifts the short-run Phillips curve downward and the unemployment inflation trade-off is less favourable.
B)   shifts the short-run Phillips curve upward and the unemployment inflation trade-off is more favourable.
C)   shifts the short-run Phillips curve downward and the unemployment inflation trade-off is more favourable.
D)   shifts the short-run Phillips curve upward and the unemployment inflation trade-off is less favourable.E) A) and C)
F) None of the above

Question 5

The long-run Phillips curve is vertical at

Accepted Answer

A)   zero unemployment.
B)   zero frictional unemployment.
C)   the natural rate of unemployment.
D)   the natural rate of inflation.E) B) and C)
F) All of the above

Question 6

According to Friedman and Phelps, the unemployment rate is equal to

Accepted Answer

A)   (the natural rate)  + (the expected inflation rate) .
B)   (the natural rate)  - (the expected inflation rate) .
C)   (the expected inflation rate)  + (the actual inflation rate) .
D)   (the natural rate)  - (the actual inflation rate - the expected inflation rate) .E) B) and D)
F) C) and D)

Question 7

According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment,

Accepted Answer

A)   the economy will experience an increase in inflation.
B)   the economy will experience a decrease in inflation.
C)   inflation will be unaffected if price expectations are unchanging.
D)   none of these answersE) A) and C)
F) B) and C)

Question 8

In the short run, an increase in aggregate demand increases prices and output, and decreases unemployment.

Accepted Answer

A) True 
 B)False

Question 9

If policymakers expand aggregate demand, then in the long run

Accepted Answer

A)   prices will be higher and unemployment will be lower.
B)   prices will be higher and unemployment will be unchanged.
C)   prices and unemployment will be unchanged.
D)   None of the above is correct.E) C) and D)
F) B) and C)

Question 10

Suppose that a central bank unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

Accepted Answer

In the short run, unemployment will rise...

Question 11

A policy of inflation targeting generally involves targeting the future rate of inflation because

Accepted Answer

A)   monetary policy changes made today will take time to have an effect on the economy.
B)   monetary policy involves changing interest rates and interest is paid annually.
C)   economists are only ever interested in the future.
D)   workers and their unions consider future inflation in their negotiations with employers.E) None of the above
F) All of the above

Question 12

According to the theory of rational expectations,

Accepted Answer

A)   the Phillips curve is upward sloping in the short run and downward sloping in the long run.
B)   both in the short and long run, the Phillips curve is horizontal.
C)   the sacrifice ratio could be zero because economic agents will very quickly adjust their inflation expectations if they believe policy makers will succeed in reducing inflation.
D)   the sacrifice ratio is very high because rational workers will work less if their wages do not rise as quickly as they expect.E) All of the above
F) B) and C)

Question 13

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.

Accepted Answer

A) True 
 B)False

Question 14

In moving along a short-run Phillips curve we are holding which of the following constant?

Accepted Answer

A)   The level of GDP.
B)   The actual inflation rate.
C)   The expected inflation rate.
D)   Employment.E) B) and C)
F) None of the above

Question 15

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

Accepted Answer

The Phillips curve shows the relation be...

Question 16

According to the theory of rational expectations,

Accepted Answer

A)   workers' experience tells them that government action to lower unemployment will not affect inflation.
B)   consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
C)   policy goals can be achieved more easily in the short run than in the long run.
D)   workers' wage demands include anticipated inflation.E) A) and D)
F) B) and D)

Question 17

In the long run what primarily determines the natural rate of unemployment? In the long run what primarily determines the inflation rate? How does this relate to the classical dichotomy?

Accepted Answer

In the long run the natural rate of unem...

Question 18

The Phillips curve illustrates the positive relationship between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 19

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

Accepted Answer

A)   a reduction in output of 5 per cent.
B)   a reduction in output of 15 per cent.
C)   a reduction in output of 20 per cent.
D)   a reduction in output of 35 per cent.E) B) and C)
F) None of the above

Question 20

If the central bank increases the money supply, then in the short run prices

Accepted Answer

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

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

According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment,

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An increase in expected inflation

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The Phillips curve illustrates the positive relationship between inflation and unemployment.

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If policymakers expand aggregate demand, then in the long run

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According to the theory of rational expectations,

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An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.

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In the short run, an increase in aggregate demand increases prices and output, and decreases unemployment.

Correct AnswerverifiedShow Answer

According to Friedman and Phelps, the unemployment rate is equal to

Correct AnswerverifiedShow Answer

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

Correct AnswerverifiedShow Answer

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

Correct AnswerverifiedShow Answer

If the central bank increases the money supply, then in the short run prices

Correct AnswerverifiedShow Answer

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

Correct AnswerverifiedThe Phillips curve shows the relation be...View AnswerShow Answer

Suppose that a central bank unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

Correct AnswerverifiedIn the short run, unemployment will rise...View AnswerShow Answer

In moving along a short-run Phillips curve we are holding which of the following constant?

Correct AnswerverifiedShow Answer

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.

Correct AnswerverifiedIf unemployment is above its natural rat...View AnswerShow Answer

The long-run Phillips curve is vertical at

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One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that

Correct AnswerverifiedShow Answer

According to the theory of rational expectations,

Correct AnswerverifiedShow Answer

A policy of inflation targeting generally involves targeting the future rate of inflation because

Correct AnswerverifiedShow Answer

In the long run what primarily determines the natural rate of unemployment? In the long run what primarily determines the inflation rate? How does this relate to the classical dichotomy?

Correct AnswerverifiedIn the long run the natural rate of unem...View AnswerShow Answer

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The Phillips curve shows the relation be...
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In the short run, unemployment will rise...
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Correct Answer
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If unemployment is above its natural rat...
View Answer

Correct Answer
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Correct Answer
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In the long run the natural rate of unem...
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