Deck 29: Inflation and Disinflation

Question 1

If the unemployment rate is less than the NAIRU,

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.

Answer 1

demand forces will exert upward pressure on wages.

Question 2

Increases in nominal wages in the economy are generally the effect of which force(s)?

A)output-gap effect
B)expectational effect
C)supply-shock inflation
D)output gap effect plus expectational effect
E)output gap effect plus expectational effect minus supply-shock inflation

Answer 2

output gap effect plus expectational effect

Question 3

Suppose the Canadian economy is facing an inflationary output gap (Y > Y*).In our macro model,such an output gap can explain changes in which of the following variables?

A)the average level of wages
B)the level of wages in the forestry sector relative to the mining sector
C)the level of wages in a high-growth region of the country relative to a slow-growth region
D)the level of wages for skilled workers relative to unskilled workers
E)the level of wages for female workers relative to male workers

Answer 3

the average level of wages

Question 4

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

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.

Question 5

Actual inflation would be 2% when expected future inflation is ________, output -gap inflation is ________, and supply-shock inflation is ________.

A)2%; 2%; 2%
B)2%; 0%; -2%
C)2%; 0%; 0%
D)1%; 1%; 1%
E)0%; 0%; -2%

Question 6

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

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 7

Which of the following would be expected to cause a an increase in the inflation rate rather than a once-and-for-all increase in the price level?

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 unit wage costs
D)expectations of higher future inflation
E)an early frost that damages the agricultural harvest

Question 8

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

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

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

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

Question 10

Which of the following is consistent with constant inflation: expected future inflation of ________, output -gap inflation of ________, and supply-shock inflation ________.

A)2%; 2%; 2%
B)2%; 0%; -2%
C)2%; 0%; 0%
D)1%; 1%; 1%
E)0%; 0%; -2%

Question 11

Suppose the NAIRU for Canada is 6%,the actual unemployment rate is 7%,and productivity is constant.We can conclude that

A)there is an inflationary gap.
B)the NAIRU will readjust to 7%.
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.

Question 12

In the basic AD/AS macro model,actual inflation is the sum of three separate components.They are

A)accelerated inflation,expected inflation and output gap inflation.
B)validated inflation,expected inflation,and output gap inflation.
C)output gap inflation,wage-push inflation and demand inflation.
D)output gap inflation,expected inflation and supply-shock inflation.
E)accelerated inflation,demand inflation and supply inflation.

Question 13

If the unemployment rate is greater than the NAIRU,

A)there will be upward pressure on wages.
B)the AS curve will shift upward.
C)there is a negative output gap.
D)real national income is above potential GDP.
E)there is an inflationary gap.

Question 14

Suppose economists were able to measure frictional unemployment as 3%,cyclical unemployment as 2%,and structural unemployment as 4%.Then we would know that

A)Y is below Y* and there is downward pressure on wages.
B)Y is below Y* and there is upward pressure on wages.
C)Y is equal to Y* and there is no pressure on wages.
D)Y is above Y* and there is downward pressure on wages.
E)Y is above Y* and there is upward pressure on wages.

Question 15

The reason why inflation can persist even after its original causes have been removed is that

A)workers expect wage increases to match increases in labour productivity.
B)workers are willing to accept wage increases lower than the increase in productivity.
C)the Bank of Canada ensures that money-supply growth matches growth in real GDP.
D)inflationary expectations cause the AS curve to continue shifting upwards.
E)governments embark on a deficit-cutting program.

Question 16

Suppose the NAIRU for Canada is 6.5%,and the actual unemployment rate is 5%.If the Bank of Canada reduces its target for the overnight interest rate,

A)it will move real GDP back toward potential GDP.
B)it will worsen the existing inflationary gap.
C)it will increase the unemployment rate.
D)the AD curve will shift to the left.
E)the AS curve will shift upward.

Question 17

If the NAIRU is 8% and the actual unemployment rate is 5%,

A)there is no pressure on the AS curve to shift.
B)there is a recessionary gap.
C)demand forces put upward pressure on wages.
D)the AS curve will shift downward.
E)it will get stuck there permanently.

Question 18

The term NAIRU stands for the

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 19

Suppose the actual rate of inflation in the economy is 5%.If we know that expected inflation is 2%,and that output-gap inflation is 1%,then we also know that

A)the NAIRU is 5%.
B)money wages must be rising by 5%.
C)non-wage supply-shock inflation must equal 2%.
D)expected inflation is rising by 2%.
E)the actual rate of inflation is falling.

Question 20

Which of the following will lead to sustained inflation?

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 21

Beginning from a position of long-run equilibrium,an expansionary monetary policy by the Bank of Canada causes

A)aggregate demand for goods and services to exceed potential output.
B)aggregate demand for goods and services to fall short of potential output.
C)an increase in most market interest rates.
D)a fall in the general price level.
E)an increase in the level of potential output.

Question 22

Assume that an economy is currently in long -run equilibrium at its potential output and that it is subjected to a positive demand shock.When the economy moves back to producing its potential level of national income,the price level will be

A)equal to what it was originally before the demand shock.
B)lower than it was in short-run equilibrium and the lower than it was originally.
C)lower than it was in the short-run equilibrium but higher than it was originally.
D)higher than it was in the short-run equilibrium but lower than it was originally.
E)higher than it was in the short-run equilibrium and even higher than it was originally.

Question 23

A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in

A)an increase the price level and an uncertain effect on unemployment.
B)a reduction in the price level and an uncertain effect on unemployment.
C)an increase in unemployment and an uncertain effect on the price level.
D)a reduction in unemployment and an uncertain effect on the price level.
E)a reduction in both unemployment and the price level.

Question 24

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

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 25

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

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

Question 26

Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant.This scenario will eventually lead to

A)an increase in wages and an upward shift of the AS curve.
B)a reduction in wages and a downward shift of the AS curve.
C)a permanent decrease in output.
D)the emergence of an inflationary gap.
E)increased transactions demand for money,and a higher rate of interest.

Question 27

When a central bank attempts to stop a constant inflation,it tries to remove the inflationary gap by

A)shifting the AS curve upward.
B)shifting the AS curve downward.
C)increasing the rightward shift of the AD curve.
D)stopping the rightward shift of the AD curve.
E)taking no action and allowing the market to correct itself.

Question 28

If the central bank responds to repeated negative supply shocks with monetary validations,the economy will be faced with

A)a one-time increase in prices.
B)a one-time decrease in prices.
C)alternating periods of inflation and deflation.
D)steady reductions in real output.
E)continuous inflation.

Question 29

Consider the AD/AS model with a constant rate of inflation.In this case,

A)there is no effective set of monetary policy tools to reduce inflation.
B)there is a tendency for the price of bonds to be increasing rapidly.
C)the AS curve is shifting upward because of inflation expectations.
D)expected inflation tends to be significantly less than actual inflation.
E)the AD curve is not shifting at all.

Question 30

Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy.This scenario will lead to

A)an increase in wages and an upward shift of the AS curve.
B)a wage-price spiral.
C)a permanent decrease in output.
D)the emergence of a recessionary gap.
E)reduced transactions demand for money,an increase in the price of bonds,and a lower rate of interest.

Question 31

A constant inflation rate can be illustrated by the AD curve shifting upward

A)with no shifts in aggregate supply.
B)at the same rate as aggregate supply shifts upward.
C)at the same rate as aggregate supply shifts downward.
D)faster than aggregate supply shifts upward.
E)faster than aggregate supply shifts downward.

Question 32

A major reason why it is so difficult to eliminate a constant inflation is that inflationary expectations

A)make it impossible to stop the rightward shift of the AD curve.
B)make it impossible to reduce aggregate expenditure.
C)keep shifting the AS curve upward.
D)keep shifting the AS curve downward.
E)cannot be influenced by monetary policy.

Question 33

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

A)Because the money transmission mechanism does not apply in a situation of sustained inflation.
B)Because the rising price level is decreasing the demand for money which is pushing interest rates up.
C)Because the declining interest rates cause the investment demand curve to shift to the right,which causes interest rates to rise.
D)Because the rising price level is increasing the demand for money which tends to push interest rates up.
E)Because the declining interest rates cause the investment demand curve to shift to the left,which causes interest rates to rise.

Question 34

A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will

A)increase the price level but have an uncertain effect on GDP.
B)reduce the price level but have an uncertain effect on GDP.
C)increase GDP but have an uncertain effect on the price level.
D)reduce GDP but have an uncertain effect on the price level.
E)increase both GDP and the price level.

Question 35

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in

A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and real GDP below potential output.
D)a higher price level and GDP at potential output.
E)an ongoing deflation in the economy.

Question 36

A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will

A)increase unemployment but have an uncertain effect on the price level.
B)reduce unemployment but have an uncertain effect on the price level.
C)increase the price level but have an uncertain effect on unemployment.
D)reduce the price level but have an uncertain effect on unemployment.
E)increase both the price level and unemployment.

Question 37

Beginning from a position of long-run equilibrium,a contractionary monetary policy by the Bank of Canada causes

A)aggregate demand for goods and services to exceed potential output.
B)potential output to exceed aggregate demand for goods and services.
C)a fall in most market interest rates.
D)an increase in the general price level.
E)an increase in potential output.

Question 38

Consider an economy without any supply shocks.If the expected inflation rate is 3% and the actual inflation rate is also 3%,then it is probably true that

A)real GDP equals potential GDP.
B)real GDP is less than potential GDP.
C)real GDP is more than potential GDP.
D)we can deduce nothing about the level of GDP.
E)the economy cannot be in a short-run equilibrium.

Question 39

A constant inflation in the AD/AS macro model is only possible when

A)AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate.
B)AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate.
C)AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate.
D)AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate.
E)None of the above - constant inflation is not possible.

Question 40

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will

A)increase GDP but have an uncertain effect on the price level.
B)reduce GDP but have an uncertain effect on the price level.
C)increase the price level but have an uncertain effect on GDP.
D)reduce the price level but have an uncertain effect on GDP.
E)reduce both the price level and GDP.

Question 41

For the economy of Ontario,which is a major oil user and importer,an increase in the world price of oil would be considered

A)monetary validation.
B)a negative demand shock.
C)demand inflation.
D)a negative supply shock.
E)an adjustment process.

Question 42

If the Bank of Canada validates a positive AD shock,

A)it will have eliminated the possibility of a continued inflation.
B)there is the risk of continued inflation.
C)wages will fall to reduce the resulting unemployment.
D)output will fall more rapidly than if the shock had not been validated.
E)the AD curve will shift to the left and inflation will stop.

Question 43

Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply.The short-term effect on the Canadian price level would be called

A)monetary validation.
B)a monetary transmission.
C)demand inflation.
D)a supply shock.
E)an adjustment process.

Question 44

The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward.The Bank of Canada validated this negative supply shock with an increase in the money supply,whereas in the United States such monetary validation did not take place.The predictable result was that

A)both countries experienced large increases in price levels and almost no recession.
B)Canada experienced a large increase in its price level but almost no recession,and the U.S.experienced a smaller increase in its price level but a significant recession.
C)Canada experienced a one-time price increase and the U.S.experienced persistent inflation.
D)the U.S.experienced a large increase in its price level but almost no recession,and Canada experienced a smaller increase in its price level but a severe recession.
E)both countries experienced small increases in price levels and severe recessions.

Question 45

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

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 46

Economists use the term ʺmonetary validationʺ to refer to

A)the money supply being increased in response to a demand shock.
B)the Bank of Canada having a credible policy of zero inflation.
C)the money supply being increased in response to a supply or a demand shock that raises the price level.
D)people who hold smaller money balances at higher rates of interest.
E)money supply increases which have been approved by Parliament.

Question 47

Suppose that an increase in world oil prices leads to greater demand for Canadian oil exports.If the Bank of Canada reduces the overnight interest rate in response to this increase in AD,this is called

A)monetary validation.
B)a demand shock.
C)demand inflation.
D)a supply shock.
E)an adjustment process.

Question 48

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

A)to reduce unemployment below the NAIRU.
B)that the Bank of Canada must be seen to be pursuing a restrictive monetary policy,in order to stop any expectational inflation.
C)that wages often fall only very slowly,so the adjustment back to full employment can take a very long time.
D)that there is the danger of initiating a wage-price spiral.
E)to keep a ʺhealthyʺ amount of inflation in the economy.

Question 49

The act of ʺmonetary validationʺ by a central bank can

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 50

For the economy of Canada,a major oil user and exporter,a decrease in the world price of oil would be considered

A)a negative demand and a negative supply shock.
B)both a negative demand shock and a positive supply shock.
C)both a positive demand shock and a negative supply shock.
D)a negative demand shock only.
E)a negative supply shock only.

Question 51

If the central bank responds to a single negative supply shock with monetary validation,we can expect an increase in

A)the money supply but a decrease in costs and prices.
B)costs but a decrease in real national income.
C)the size of the output gap.
D)costs,the price level,and the money supply.
E)the price level and unemployment.

Question 52

ʺSupply inflationʺ refers to

A)inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production.
B)inflation arising from a shortage of labour.
C)the increase in the price level that occurs when the excess demand for inputs pushes up input costs.
D)the increase in the price level that occurs when there is excess supply of factors of production.
E)any increase in the price level that results from an upward shift of the AD curve.

Question 53

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

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

Question 54

Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y*,a positive AD shock (with no change in the money supply)will eventually result in

A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and GDP below its potential level.
D)a higher price level and GDP at its potential level.
E)a lower price level and GDP at its potential level.

Question 55

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

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 56

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

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 57

Suppose the economy is operating at full employment.A permanent rightward shift in the AD curve will cause inflationary pressures that will

A)cause Y to fall below Y*.
B)worsen any existing unemployment problem.
C)initiate a wage-price spiral.
D)eventually subside unless accompanied by expansionary monetary policy.
E)permanently increase output.

Question 58

A central bank might decide to ʺvalidateʺ a negative supply shock because

A)there is no other way to return the economy to full employment.
B)the economy might suffer a long slump before wages and prices fall enough to restore full employment.
C)central banks tend to pay little heed to inflation.
D)it is an effective means of preventing inflation.
E)there are no negative effects from this policy action.

Question 59

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

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.

Question 60

Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil.If the central bank does not respond to this shock,

A)prices will rise and stay at the higher level with no further inflation.
B)a recessionary gap will be created,which will eventually cause the AS curve to shift back downward.
C)aggregate demand will shift up and cause further inflation.
D)an inflationary gap will be created,which will cause the AS curve to shift upward again.
E)a recessionary gap will be created and will cause a permanent reduction in employment.

Question 61

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

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 62

According to the ʺacceleration hypothesis,ʺ the inflation rate will accelerate when actual output is held

A)at the NAIRU.
B)at the level where unemployment is at the natural rate.
C)below potential output.
D)at potential output.
E)above potential output.

Question 63

The acceleration hypothesis states that

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 64

The idea that,in the long run,the Phillips curve is vertical,implying no trade -off between inflation and unemployment,is based on the premise that

A)inflation and unemployment are unrelated.
B)expectations do not adjust to reflect actual inflation.
C)changes in unemployment do not influence real GDP.
D)inflationary expectations fully adjust to actual inflation.
E)inflationary expectations do not influence inflation.

Question 65

If the central bank uses monetary policy to attempt to hold real GDP ( Y)permanently above potential GDP (Y*),

A)inflation can be kept at a low,constant rate.
B)inflation is not a problem,but unemployment is.
C)inflation will accelerate over time.
D)it will fail.
E)the AD curve will shift leftward to cure the inflation problem.

Question 66

A contractionary monetary policy that has been imposed to reduce inflation will most likely

A)have no effect on the short-run level of GDP and unemployment.
B)not control inflation,since money supply changes have little or no effect on the price level.
C)produce long-lasting unemployment if wages adjust rapidly.
D)lead to a recession that is long and severe,under any circumstances.
E)lead to a recession which will be short if inflation expectations adjust rapidly and accurately.

Question 67

The reason that some economists advise central banks to never validate a negative supply shock is

A)because the economyʹs adjustment process is ineffective.
B)the monetary validation causes downward pressure on wages.
C)the monetary validation results in a higher level of unemployment.
D)that there are no short-run effects on any real variables,and so it is not worthwhile.
E)to avoid the possibility of entrenching expectations and creating a wage-price spiral.

Question 68

Suppose we know the following information about a hypothetical economy: - real GDP = $945 billion
- potential GDP = $900 billion
- inflation rate = 3%
If the central bank conducts monetary policy in an attempt to keep the unemployment rate below the NAIRU,the inflation rate is likely to

A)cause stagflation.
B)cause a recession.
C)remain constant at 3%.
D)fall below 3%.
E)rise above 3%.

Question 69

ʺDemand inflationʺ refers to

A)the inflation that results from a decrease in net exports.
B)any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation.
C)any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation.
D)only the inflation that results from an expansionary monetary policy.
E)the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.

Question 70

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

A)an inflationary gap will be created with further inflation.
B)an inflationary gap will be created,which will cause the AS curve to shift upward again.
C)the aggregate demand curve will shift up and result in a higher price level.
D)a recessionary gap will be created,which eventually causes the AS curve to shift downward.
E)a recessionary gap will be created and will cause a permanent reduction of employment.

Question 71

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

A)if there is no monetary validation.
B)in the long run.
C)in the short run.
D)independent of the economyʹs adjustment process.
E)if expected inflation is positive but constant.

Question 72

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

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

Question 73

Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the ʺgood times.ʺ If the Bank of Canada does so by implementing an expansionary monetary policy,it would

A)cause a temporary drop in inflation.
B)decrease the actual inflation rate.
C)cause a permanent recessionary gap.
D)be acting to de-stabilize the economy.
E)decrease employment.

Question 74

The view that sustained inflation is possible only with continuous monetary validation is now widely accepted but was made famous by and is still closely associated with

A)John Maynard Keynes.
B)Adam Smith.
C)David Ricardo.
D)Milton Friedman.
E)James Tobin.

Question 75

The Phillips curve originally appeared to demonstrate a trade-off between inflation and unemployment.This was later thought to be deficient because

A)it was later recognized that inflation and unemployment were unrelated.
B)the influence on aggregate demand had not been incorporated.
C)changes in unemployment had not been incorporated.
D)the effects of fiscal policy on aggregate demand had not been incorporated.
E)inflationary expectations had not been incorporated.

Question 76

It is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation because inflationary expectations cause the

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 upward.
D)AS curve to continue shifting downward.
E)AD curve to continue shifting to the right.

Question 77

Consider the statement ʺInflation is everywhere and always a monetary phenomenon.ʺ This statement does not hold true

A)as long as demand and supply shocks are validated by expansionary monetary policy.
B)if the economyʹs adjustment process is working effectively.
C)for temporary bursts of inflation that are not accompanied by a monetary expansion.
D)as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left.
E)in industrialized economies.

Question 78

Suppose we know the following information about a hypothetical economy: - real GDP = $550 billion
- potential GDP = $500 billion
- inflation rate = 4%
If the central bank tries to keep real GDP constant at $550 billion,the inflation rate is likely to

A)remain constant at 4%.
B)fall below 4%.
C)rise above 4%.
D)cause stagflation.
E)cause a recession.

Question 79

It is often said that inflation is a ʺmonetary phenomenon.ʺ The most accurate interpretation of this phrase is that

A)the price level cannot rise without an increase in the money supply.
B)a continuous rise in prices is possible only with continuing increases in the money supply.
C)only an increase in the money supply can start a period of inflation.
D)repeated supply shocks cannot drive up prices if there is no monetary validation.
E)increases in the price level are always associated with increases in the money supply.

Question 80

Suppose we know the following information about a hypothetical economy: - actual unemployment rate = 6%
- NAIRU = 8%
- inflation rate = 4%
If the central bank tries to maintain the current output gap,we can expect the inflation rate to

A)remain constant at 4%.
B)fall below 4%.
C)rise above 4%.
D)cause stagflation.
E)cause a recession.