Deck 26: Australian Macroeconomic Fluctuations

Question 1

Looking at Australia's historical data since the 1990s, we see that growth in real GDP

A)was not correlated with fluctuations in productivity growth.
B)fluctuated with fluctuations in productivity growth.
C)fell following an increase in productivity growth.
D)rose following a decrease in productivity growth.

Answer 1

B

Question 2

A decrease in the expected inflation rate shifts the short- run Phillips curve

A)upward and shifts the long- run Phillips curve rightward.
B)downward and shifts the long- run Phillips curve leftward.
C)upward and creates a movement upward along the long- run Phillips curve.
D)downward and creates a movement downward along the long- run Phillips curve.

Answer 2

D

Question 3

Moving along the short- run Phillips curve indicates

A)that the natural unemployment rate falls when the inflation rate rises.
B)a tradeoff between inflation and unemployment so that higher inflation is related to lower unemployment.
C)that higher inflation leads to a higher unemployment rate.
D)that higher unemployment leads to a higher inflation rate.

Answer 3

B

Question 4

An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long- run equilibrium with

A)a higher price level and an increased level of real GDP.
B)a higher price level but the same real GDP.
C)the same price level and a lower level of real GDP.
D)None of the above answers is correct.

Question 5

An increase in the expected inflation rate shifts the

A)short- run Phillips curve downward.
B)long- run Phillips curve downward.
C)short- run Phillips curve upward.
D)long- run Phillips curve upward.

Question 6

The new classical cycle theory predicts that an unexpected increase in aggregate demand create a business cycle and an expected increase in aggregate demand create a business cycle.

A)will; will
B)will not; will not
C)will; will not
D)will not; will

Question 7

Which of the following is NOT one of the criticisms of real business cycle theory?

A)Productivity fluctuations are the result of the business cycle, not the cause of business cycles.
B)The money wage rate is sticky in the short run.
C)Intertemporal substitution is too weak.
D)The theory is built on weak microeconomic foundations.

Question 8

Which of the following could lead to demand- pull inflation?

A)An increase in the quantity of money
B)An increase in oil prices
C)A decrease in exports
D)An increase in the money wage rate

Question 9

In the above figure, which path represents a cost- push inflation?

A)Point A to B to D to F to G
B)Point A to B to D to E to G
C)Point A to C to D to F to G
D)Point A to C to D to E to G

Question 10

If an economy at potential GDP experiences a demand shock that shifts the aggregate demand curve rightward, there will be

A)unemployment below the natural rate.
B)upward pressure on money wage rates.
C)an eventual leftward shift in the short- run aggregate supply curve.
D)All of the above answers are correct.

Question 11

If the real interest rate is 2 per cent and workers expect real wages to be 4 per cent higher next year, according to the real business cycle theory, workers will work

A)less this year and more next year.
B)less this year and less next year.
C)more this year and more next year.
D)more this year and less next year.

Question 12

If the natural unemployment rate increases, then the short- run Phillips curve shifts and the long- run Phillips curve shifts .

A)leftward; leftward
B)rightward; leftward
C)rightward; rightward
D)leftward; rightward

Question 13

Cost- push inflation can be started by

A)a decrease in the money wage rate.
B)a decrease in government expenditure on goods and services.
C)an increase in the quantity of money.
D)an increase in the money prices of raw materials.

Question 14

Cost- push inflation starts with

A)a decrease in short- run aggregate supply.
B)a decrease in aggregate demand.
C)an increase in short- run aggregate supply.
D)an increase in aggregate demand.

Question 15

Which of the following could NOT start a demand- pull inflation?

A)Increases in net exports
B)Increases in oil prices
C)Increases in the quantity of money
D)Increases in government expenditure

Question 16

Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP?

A)Keynesian cycle theory
B)Monetarist cycle theory
C)New classical cycle theory
D)Real business cycle theory

Question 17

In the above figure, the movement from point A to B to C to D to E represents

A)demand- pull inflation resulting solely from wage responses to excess labour demand.
B)cost- push inflation resulting from persistent increases in the quantity of money.
C)demand- pull inflation resulting from persistent increases in the quantity of money.
D)cost- push inflation resulting solely from wage responses to excess labour demand.

Question 18

An increase in the natural unemployment rate shifts

A)both the short- run and the long- run Phillips curves rightward.
B)neither the short- run nor the long- run Phillips curve.
C)the short- run but not the long- run Phillips curve rightward.
D)the long- run but not the short- run Phillips curve rightward.

Question 19

In the above figure, suppose that the economy is currently at point A. If the inflation rate rises and this rise is anticipated by the public, the economy moves to a point such as point

A)B.
B)C.
C)D.
D)E.

Question 20

According to real business cycle (RBC)theory, a change in the quantity of money leads to

A)a change in the price level but no change in real GDP.
B)a change in the real wage rate and the money wage rate.
C)a change in the price level and in real GDP.
D)a change in investment and real GDP.

Question 21

According to the real business cycle theory, the immediate effects from a change in productivity include which of the following?

A)I
B)I and II
C)I and III
D)II and III

Question 22

Which theory emphasises frequent changes in investment because of "animal spirits" as the main source of economic fluctuations?

A)Keynesian cycle theory
B)Monetarist cycle theory
C)New classical cycle theory
D)Real business cycle theory

Question 23

Keynes used the term "animal spirits" to represent

A)the ease of forecasting.
B)fluctuations in business confidence.
C)investment based on hard facts about the future.
D)changes in people's consumption expenditures.

Question 24

Phillips curves show the relationship between the

A)expected rate of inflation and the nominal interest rate.
B)nominal interest rate and the real interest rate.
C)real interest rate and the unemployment rate.
D)unemployment rate and the inflation rate.

Question 25

Which of the following factors could start a demand- pull inflation?

A)An increase in tax rates
B)An increase in exports
C)A decrease in wage rates
D)A decrease in government expenditure

Question 26

Real business cycle economists claim that the intertemporal substitution effect

A)depends on the real interest rate.
B)plays a large role in the economy only during expansions.
C)has unpredictable effects on the economy.
D)plays a small role in the labour market.

Question 27

If the RBA responds to an initial increase in aggregate demand by increasing the quantity of money,

A)real GDP will begin to decrease more rapidly than if the quantity of money had remained constant.
B)money wages will fall to reduce unemployment.
C)there will be no inflationary gap.
D)there is a risk of continued inflation.

Question 28

Which of the following pieces of evidence is most consistent with the monetarist cycle theory?

A)Changes in real GDP and the quantity of money move closely together.
B)Money wage rates take some time to adjust to price changes.
C)Productivity and GDP move closely together.
D)Labour supply decisions do not seem to depend on real interest rates.

Question 29

In the above figure, suppose that the economy is at point A when foreign countries begin an expansion and buy more Australian- made goods. In the short run, this change creates a movement to point and an eventual increase in .

A)D; money wage rates
B)D; the natural unemployment rate
C)B; money wage rates
D)B; the natural unemployment rate

Question 30

Moving along a short- run Phillips curve,

A)the price level is constant.
B)the expected inflation rate is constant.
C)unemployment is constant.
D)the inflation rate is constant.

Question 31

The short- run Phillips curve intersects the long- run Phillips curve at the

A)natural interest rate.
B)nominal interest rate.
C)expected inflation rate.
D)natural inflation rate.

Question 32

In the above figure, suppose that the economy is at point C. If the inflation rate is lower than expected,

A)the LRPC will shift rightward.
B)the SRPC will shift upward.
C)the SRPC will shift downward.
D)Neither the LRPC nor the SRPC will shift.

Question 33

In the above figure, the economy is at point A. An increase in oil prices that sets off a cost- push inflation will initially move the economy from point A to point

A)A, that is, the economy does not change.
B)B.
C)C.
D)D.

Question 34

In the short run, an unexpected increase in the inflation rate leads to

A)a decrease in aggregate demand.
B)workers thinking the money wage rate has fallen.
C)a higher unemployment rate.
D)a lower unemployment rate.

Question 35

Consider Australian data for inflation and unemployment rates for the last five decades. Which of the following statements correctly describes the relationship between the two variables?

A)Several different short- run Phillips curves representing different natural unemployment rates and different expected inflation rates existed.
B)There is a positive relationship.
C)The natural unemployment rate did not change but the expected inflation rate did change over these years.
D)None of the above answers is correct.

Question 36

The position of the long- run Phillips curve is determined by

A)the quantity of money.
B)the expected inflation rate.
C)the natural unemployment rate.
D)the inflation rate.

Question 37

The factor leading to business cycles according to the real business cycle theory is changes in

A)investment caused by changes in business confidence.
B)technology caused by changes in productivity.
C)the growth rate of the quantity of money.
D)productivity caused by changes in technology.

Question 38

The initial factors that can create cost- push inflation do NOT include

A)increases in the quantity of money.
B)increases in the money prices of raw materials.
C)increases in money wage rates.
D)None of the above because all could be the initial cause of cost- push inflation.

Question 39

The cycle theory states that only unexpected fluctuations in aggregate demand are the main source of business cycles.

A)new Keynesian
B)Keynesian
C)monetarist
D)new classical

Question 40

Which of the following pieces of evidence is most consistent with the real business cycle theory?

A)Money wage rates take some time to adjust to price changes.
B)Real GDP and the quantity of money move closely together.
C)Labour supply decisions do not seem to depend on real interest rates.
D)Productivity and GDP move closely together.

Question 41

In the above figure, what might have shifted the short- run Phillips curve from SRPC1 to SRPC2 while leaving the long- run Phillips curve unchanged at LRPC?

A)The natural unemployment rate increased.
B)The expected inflation rate increased.
C)The natural unemployment rate decreased.
D)The expected inflation rate decreased.

Question 42

According to the new Keynesian cycle theory of the business cycle, which of the following can trigger a business cycle expansion?

A)I only
B)II and III
C)I, II and III
D)None of these three will trigger an expansion.

Question 43

Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor creating business cycles?

A)I only
B)I and II
C)I and III
D)I, II and III

Question 44

The figure above shows the aggregate demand, short- run aggregate supply, and long- run aggregate supply curves for the Australian economy. The economy is currently at point A. A cost- push rise in the price level will initially move the economy to point _ and to point
.

A)B when aggregate demand decreases; C when the money prices of raw materials rise
B)F; A when the money prices of raw materials change
C)C when the money prices of raw materials rise; D when aggregate demand increases
D)E when aggregate demand increases; D when the money prices of raw materials rise

Question 45

When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,

A)workers will overestimate the real wage rate.
B)unemployment will be at the natural rate.
C)workers will underestimate the real wage rate.
D)there will be no unemployment.

Question 46

By itself, a supply shock such as a hike in the price of oil, can

A)cause real GDP to permanently decrease year after year.
B)cause a wage- price spiral.
C)not cause inflation.
D)be inflationary as long as there is no policy response.

Question 47

Which of the following is true regarding the monetarist theory of the business cycle?

A)III only
B)I and II
C)II and III
D)I only

Question 48

In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a _ quantity of saving and a _ real interest rate.

A)higher; lower
B)lower; lower
C)lower; higher
D)higher; higher

Question 49

A key difference between the new classical and the new Keynesian views of the business cycle is the role played by

A)expected changes in aggregate demand.
B)the growth rate of the quantity of money.
C)government expenditure on goods and services.
D)unexpected changes in aggregate demand.

Question 50

Which of the following describes the Keynesian approach to the business cycle?

A)III only
B)II and III
C)I only
D)I and II

Question 51

Real business cycle theory states that the factor leading to the business cycle is changes in

A)productivity.
B)aggregate demand only.
C)animal spirits.
D)the growth rate of the quantity of money.

Question 52

In the above figure, suppose the economy starts at point A. The short- run response to an increase in the growth rate of the quantity of money in the monetarist business cycle theory is for the price level to _ and real GDP to .

A)rise to 130; remain at $13 billion
B)remain at 110; remain at $13 billion
C)fall to 90; remain at $13 billion
D)rise to 120; increase to $15 billion

Question 53

If demand- pull inflation occurs when the economy is already at potential GDP, then, following the initial increase in aggregate demand, the

A)LAS curve shifts rightward.
B)SAS curve shifts leftward.
C)SAS curve shifts rightward.
D)LAS curve shifts leftward.

Question 54

In the above figure, if the economy moves from point A to point E,

A)money wage rates have increased.
B)there may have been demand- pull inflation.
C)there has been economic growth.
D)Both answers A and B are correct.

Question 55

Along a short- run Phillips curve, suppose the expected inflation rate is 6 per cent. If the inflation rate turns out to be 8 per cent instead,

A)there is a movement downward along the short- run Phillips curve.
B)there is a downward shift of the short- run Phillips curve.
C)there is a movement upward along the short- run Phillips curve.
D)None of the above answers is correct.

Question 56

Suppose that the money prices of raw materials increase so that short- run aggregate supply decreases. If the Reserve Bank does not respond, the higher money price of raw materials will

A)I only
B)Both I and II
C)Both II and III
D)III only

Question 57

In the above figure, suppose the economy has moved from point D to point B. According to the monetarist theory of the business cycle, what could have caused this movement?

A)An increase in the money wage rate
B)An increase in uncertainty about future sales and profits
C)A decrease in the money wage rate
D)An increase in the growth rate of the quantity of money

Question 58

The factor leading to business cycles in the cycle theory is unexpected fluctuations in aggregate demand while in the cycle theory both unexpected and expected fluctuations in aggregate demand are factors that lead to business cycles.

A)new classical; monetarist
B)new Keynesian; Keynesian
C)monetarist; new Keynesian
D)new classical; new Keynesian

Question 59

Stagflation is the combination of a _ and .

A)falling price level; an increasing real GDP
B)rising price level; a decreasing real GDP
C)falling inflation rate; an increasing real GDP
D)rising inflation rate; a decreasing real GDP

Question 60

The anticipated inflation rate is 5 per cent. In order for purchasing power to remain constant, the money wage rate must rise by

A)7 per cent.
B)5 per cent.
C)2 per cent.
D)12 per cent.

Question 61

Which of the following is NOT an aggregate demand, mainstream theory of the business cycle?

A)Monetarist cycle theory
B)New classical cycle theory
C)Real business cycle theory
D)Keynesian cycle theory

Question 62

An increase in the expected inflation rate shifts

A)both the short- run and the long- run Phillips curves upward.
B)neither the short- run nor the long- run Phillips curve.
C)the short- run but not the long- run Phillips curve upward.
D)the long- run but not the short- run Phillips curve upward.

Question 63

Suppose that the Reserve Bank is expected to expand the quantity of money by 5 per cent but ends up expanding it by only 2 per cent. If the new Keynesian cycle theory is correct, which of the following describes the effect on the economy?

A)Workers' decisions about when to work will be affected.
B)Inflation will be higher than expected.
C)The economy experiences a boom because the quantity of money is still growing.
D)A recession will ensue.

Question 64

"Intertemporal substitution" in labour supply describes changes in labour supply in response to changes in

A)the real interest rate.
B)investment spending.
C)personal tax rates.
D)consumer demand for goods.

Question 65

In Australia, when both the unemployment rate and the inflation rate rose during the 1970s and 1980s, it is reasonable to conclude that

A)only the short- run Phillips curve shifted.
B)both the short- run and long- run Phillips curves shifted rightward.
C)both the short- run and long- run Phillips curves shifted leftward.
D)only the long- run Phillips curve shifted.

Question 66

In monetarist business cycle theory, decreasing the growth rate of the quantity of money and increasing the growth rate of the quantity of money .

A)causes the economy to enter an expansion; causes the economy to enter a recession
B)causes the economy to enter a recession; causes the economy to enter an expansion
C)decreases real GDP; decreases the inflation rate
D)increases real GDP; decreases the inflation rate

Question 67

The short- run Phillips curve shows the tradeoff between , holding the expected inflation rate and the natural unemployment rate constant.

A)inflation and employment
B)the price level and unemployment
C)the price level and real GDP
D)inflation and unemployment

Question 68

In the above figure, suppose that the economy is currently at point A. If the inflation rate rises and this rise is NOT expected by the public, the economy moves to a point such as point

A)B.
B)C.
C)D.
D)E.

Question 69

The figure above shows an economy's Phillips curves. Currently, the inflation rate is 6 per cent a year. The natural unemployment rate is _ per cent and the expected inflation rate is
Per cent a year.

A)6; 4
B)4; 6
C)6; 6
D)6; 10

Question 70

A cost- push inflation spiral results if the Reserve Bank's response to stagflation is to keep

A)increasing aggregate demand.
B)decreasing aggregate demand.
C)increasing aggregate supply.
D)decreasing aggregate supply.

Question 71

During a cost- push inflation spiral, the money wage rate _ and the quantity of money
.

A)does not change; does not change
B)increases; does not change
C)does not change; increases
D)increases; increases

Question 72

In the above figure, the economy is initially at point A and then an increase in the quantity of money moves the economy to point D. The money wage rate will

A)fall because a labour shortage now exists.
B)fall because a labour surplus now exists.
C)rise because a labour shortage now exists.
D)rise because a labour surplus now exists.

Question 73

A movement along the SAS curve that brings a lower price level and a decrease in real GDP is equivalent to a

A)movement along a short- run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate.
B)movement along a short- run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate.
C)shift in the short- run Phillips curve that brings a decrease in the inflation rate and an increase in the unemployment rate.
D)shift in the short- run Phillips curve that brings an increase in the inflation rate and an increase in the unemployment rate.

Question 74

New Keynesian economists believe that is influenced by .

A)yesterday's rational expectations of the price level; today's money wage rate
B)today's money wage rate; today's rational expectations of the price level
C)yesterday's money wage rate; today's rational expectations of the money wage
D)today's money wage rate; yesterday's rational expectations of the price level

Question 75

An economy is in long- run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD1. If the increase in aggregate demand is expected, then the inflation rate is .

A)0 per cent a year
B)10 per cent a year
C)20 per cent a year
D)more than 20 per cent a year

Question 76

Which of the following can start an inflation?

A)An increase in aggregate demand
B)An increase in aggregate supply
C)A decrease in aggregate supply
D)Both answers A and C are correct.

Question 77

If the unemployment rate initially equals its natural rate, and then the inflation rate rises above its expected rate, the unemployment rate .

A)falls below its natural rate
B)rises above its natural rate
C)remains constant
D)equals the natural rate

Question 78

Which theory of the business cycle maintains that the money wage rate always adjusts freely?

A)Keynesian cycle theory
B)Real business cycle theory
C)Monetarist cycle theory
D)Both the new classical cycle theory and the new Keynesian cycle theory

Question 79

Which theory views fluctuations in productivity as the main source of business cycle fluctuations?

A)Keynesian cycle theory
B)Monetarist cycle theory
C)Real business cycle theory
D)New classical cycle theory

Question 80

The business cycle impulse in the new classical theory of the business cycle is

A)fluctuations in money growth with rigid wages.
B)expected changes in aggregate demand.
C)fluctuations in investment coupled with rigid wages.
D)unexpected changes in aggregate demand.