Question 1

The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the

Accepted Answer

A) AD curve to shift too far to the right. 
B) AD curve to shift too far to the left. 
C) AS curve to continue shifting downward. 
D) AS curve to continue shifting upward. 
E) AD curve to continue shifting to the right. 
A) AD curve to shift too far to the right. 
B) AD curve to shift too far to the left. 
C) AS curve to continue shifting downward. 
D) AS curve to continue shifting upward. 
E) AD curve to continue shifting to the right. D

Question 2

Isolated negative aggregate supply shocks,in the absence of monetary validation,will

Accepted Answer

A) eventually be self-correcting as wages slowly fall. 
B) never be self-correcting without government policy to expand the money supply. 
C) be self-correcting only if the aggregate demand curve shifts. 
D) result in a permanent output gap. 
E) have no short-run or long-run effects. 
A) eventually be self-correcting as wages slowly fall. 
B) never be self-correcting without government policy to expand the money supply. 
C) be self-correcting only if the aggregate demand curve shifts. 
D) result in a permanent output gap. 
E) have no short-run or long-run effects. A

Question 3

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

Accepted Answer

A) there is a recessionary gap. 
B) the NAIRU will re-adjust to 5%. 
C) the AD curve will automatically shift up. 
D) the excess demand for labour will put upward pressure on wages. 
E) the excess supply of labour will put downward pressure on wages. 
A) there is a recessionary gap. 
B) the NAIRU will re-adjust to 5%. 
C) the AD curve will automatically shift up. 
D) the excess demand for labour will put upward pressure on wages. 
E) the excess supply of labour will put downward pressure on wages. D

Question 4

Canadaʹs actual rate of inflation is fairly constant around the 2% level.We can conclude that

Accepted Answer

A) real GDP must be below potential GDP because we also have positive unemployment. 
B) real GDP must be above potential GDP. 
C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. 
D) the expectations about inflation are consistently wrong. 
E) the economy is consistently experiencing an inflationary gap. 
A) real GDP must be below potential GDP because we also have positive unemployment. 
B) real GDP must be above potential GDP. 
C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. 
D) the expectations about inflation are consistently wrong. 
E) the economy is consistently experiencing an inflationary gap.

Question 5

If the unemployment rate is less than the NAIRU,

Accepted Answer

A) there is no pressure on the AS curve to shift. 
B) there is a recessionary output gap. 
C) demand forces will exert upward pressure on wages. 
D) the AS curve will shift downward. 
E) there will be downward pressure on wages. 
A) there is no pressure on the AS curve to shift. 
B) there is a recessionary output gap. 
C) demand forces will exert upward pressure on wages. 
D) the AS curve will shift downward. 
E) there will be downward pressure on wages.

Question 6

The Bank of Canada has formally adopted an inflation target of 2%.One important reason for this is

Accepted Answer

A) the supply-shock inflation will never exceed this amount. 
B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. 
C) that output-gap inflation will never exceed this amount. 
D) to allow for a permanent inflationary gap which is beneficial to the economy. 
E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU. 
A) the supply-shock inflation will never exceed this amount. 
B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. 
C) that output-gap inflation will never exceed this amount. 
D) to allow for a permanent inflationary gap which is beneficial to the economy. 
E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU.

Question 7

Inflationary pressures that result from a rightward shift in the AD curve

Accepted Answer

A) cause Y to fall below Y*. 
B) will worsen any existing unemployment problem. 
C) will initiate a wage-price spiral. 
D) will eventually subside unless accompanied by continual increases in the money supply. 
E) will permanently increase output. 
A) cause Y to fall below Y*. 
B) will worsen any existing unemployment problem. 
C) will initiate a wage-price spiral. 
D) will eventually subside unless accompanied by continual increases in the money supply. 
E) will permanently increase output.

Question 8

Other things being equal,unit costs will rise and the AS curve will shift upward if

Accepted Answer

A) there is a fall in the price of oil. 
B) the government reduces payroll taxes. 
C) wage increases exceed productivity increases. 
D) wages rise. 
E) wage and price controls are in effect. 
A) there is a fall in the price of oil. 
B) the government reduces payroll taxes. 
C) wage increases exceed productivity increases. 
D) wages rise. 
E) wage and price controls are in effect.

Question 9

Which of the following will lead to sustained inflation?

Accepted Answer

A) the imposition of a new sales tax 
B) the sudden doubling of a key raw materials price 
C) a new payroll tax that raises firmsʹ unit labour costs 
D) persistent expectations of continued inflation 
E) an early frost that damages the agricultural harvest 
A) the imposition of a new sales tax 
B) the sudden doubling of a key raw materials price 
C) a new payroll tax that raises firmsʹ unit labour costs 
D) persistent expectations of continued inflation 
E) an early frost that damages the agricultural harvest

Question 10

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

Accepted Answer

A) +12%. 
B) + 6%. 
C) 0%. 
D) - 6%. 
E) - 12%. 
A) +12%. 
B) + 6%. 
C) 0%. 
D) - 6%. 
E) - 12%.

Question 11

The act of ʺmonetary validationʺ by a central bank can

Accepted Answer

A) cause a supply shock. 
B) perpetuate inflation. 
C) act to reduce inflation. 
D) increase unemployment. 
E) no longer be carried out by the Bank of Canada. 
A) cause a supply shock. 
B) perpetuate inflation. 
C) act to reduce inflation. 
D) increase unemployment. 
E) no longer be carried out by the Bank of Canada.

Question 12

The statement that ʺinflation is everywhere and always a monetary phenomenonʺ is closely associated with

Accepted Answer

A) John Maynard Keynes. 
B) Milton Friedman. 
C) John Crow. 
D) David Dodge. 
E) Adam Smith. 
A) John Maynard Keynes. 
B) Milton Friedman. 
C) John Crow. 
D) David Dodge. 
E) Adam Smith.

Question 13

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

Accepted Answer

A) an inflationary gap. 
B) a one-time rise in the price level. 
C) rising unemployment until the wage increases cease,or are offset by other wage decreases. 
D) a shrinking output gap. 
E) peace in labour-management relations. 
A) an inflationary gap. 
B) a one-time rise in the price level. 
C) rising unemployment until the wage increases cease,or are offset by other wage decreases. 
D) a shrinking output gap. 
E) peace in labour-management relations.

Question 14

The term NAIRU stands for the

Accepted Answer

A) non-accelerating inflation rate of unemployment. 
B) natural and indexed rate of unemployment. 
C) non-accelerating,indexed and regulated unemployment. 
D) North American indexed rate of unemployment. 
E) North American inflation rate of unemployment. 
A) non-accelerating inflation rate of unemployment. 
B) natural and indexed rate of unemployment. 
C) non-accelerating,indexed and regulated unemployment. 
D) North American indexed rate of unemployment. 
E) North American inflation rate of unemployment.

Question 15

At the end of the 1970s,the inflation rate in Canada had exceeded 10%.This high inflation was due mainly to

Accepted Answer

A) external pressures on the Canadian dollar. 
B) steadily decreasing factor prices. 
C) steadily decreasing factor prices and a contractionary monetary policy. 
D) a substantial negative supply shock that was partly validated by monetary policy. 
E) the extremely high wage increases being won by strong labour unions. 
A) external pressures on the Canadian dollar. 
B) steadily decreasing factor prices. 
C) steadily decreasing factor prices and a contractionary monetary policy. 
D) a substantial negative supply shock that was partly validated by monetary policy. 
E) the extremely high wage increases being won by strong labour unions.

Question 16

For the economy of Alberta,a major oil exporter,an increase in the world price of oil would be mostly

Accepted Answer

A) supply inflation. 
B) a negative demand shock. 
C) a negative supply shock. 
D) a positive demand shock. 
E) a positive supply shock. 
A) supply inflation. 
B) a negative demand shock. 
C) a negative supply shock. 
D) a positive demand shock. 
E) a positive supply shock.

Question 17

The acceleration hypothesis states that

Accepted Answer

A) when the central bank holds an inflationary gap constant,inflation will tend to accelerate. 
B) if an economy is growing,inflation will grow at an ever-increasing rate. 
C) capital investment is the primary cause of inflation. 
D) monetary validation causes inflation. 
E) if a recessionary gap is not closed,unemployment will tend to accelerate. 
A) when the central bank holds an inflationary gap constant,inflation will tend to accelerate. 
B) if an economy is growing,inflation will grow at an ever-increasing rate. 
C) capital investment is the primary cause of inflation. 
D) monetary validation causes inflation. 
E) if a recessionary gap is not closed,unemployment will tend to accelerate.

Question 18

Suppose the AS curve is continuously shifting upward due to expectations of future inflation.If there is repeated monetary validation of this supply shock,

Accepted Answer

A) unemployment will continue to rise. 
B) the supply shocks will reverse themselves. 
C) workers will have higher real wages. 
D) there will be ongoing inflation. 
E) there will be a once-and-for-all rise in the price level. 
A) unemployment will continue to rise. 
B) the supply shocks will reverse themselves. 
C) workers will have higher real wages. 
D) there will be ongoing inflation. 
E) there will be a once-and-for-all rise in the price level.

Question 19

Consider an economy that is in the process of a disinflation.If the sacrifice ratio is 3,then

Accepted Answer

A) unemployment increases by 3% for every 1% reduction in inflation. 
B) it costs 3% of GDP to reduce inflation by 1 percentage point. 
C) the cumulative loss of output in the economy will reach a total of 3%. 
D) the costs of disinflation are 3 times the benefits of disinflation. 
E) unemployment increases by 3% during the period of disinflation 
A) unemployment increases by 3% for every 1% reduction in inflation. 
B) it costs 3% of GDP to reduce inflation by 1 percentage point. 
C) the cumulative loss of output in the economy will reach a total of 3%. 
D) the costs of disinflation are 3 times the benefits of disinflation. 
E) unemployment increases by 3% during the period of disinflation

Question 20

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%.In order to prevent a drop in your real salary over the year,your employer would have to agree to change your nominal salary by

Accepted Answer

A) - 12%. 
B) - 6%. 
C) 0. 
D) + 6%. 
E) + 12%. 
A) - 12%. 
B) - 6%. 
C) 0. 
D) + 6%. 
E) + 12%.

Exam 29: Inflation and Disinflation

The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the

Isolated negative aggregate supply shocks,in the absence of monetary validation,will

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

Canadaʹs actual rate of inflation is fairly constant around the 2% level.We can conclude that

If the unemployment rate is less than the NAIRU,

The Bank of Canada has formally adopted an inflation target of 2%.One important reason for this is

Inflationary pressures that result from a rightward shift in the AD curve

Other things being equal,unit costs will rise and the AS curve will shift upward if

Which of the following will lead to sustained inflation?

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

The act of ʺmonetary validationʺ by a central bank can

The statement that ʺinflation is everywhere and always a monetary phenomenonʺ is closely associated with

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

The term NAIRU stands for the

At the end of the 1970s,the inflation rate in Canada had exceeded 10%.This high inflation was due mainly to

For the economy of Alberta,a major oil exporter,an increase in the world price of oil would be mostly

The acceleration hypothesis states that

Suppose the AS curve is continuously shifting upward due to expectations of future inflation.If there is repeated monetary validation of this supply shock,

Consider an economy that is in the process of a disinflation.If the sacrifice ratio is 3,then

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%.In order to prevent a drop in your real salary over the year,your employer would have to agree to change your nominal salary by

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