Deck 13: The Short-Run Policy Tradeoff

Question 1

The short-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when ________ remain(s) constant.

A) monetary policy
B) interest rates
C) the natural unemployment rate and the expected inflation rate
D) fiscal policy
E) aggregate demand

Answer 1

the natural unemployment rate and the expected inflation rate

Question 2

The figure above shows the Phillips curve for an economy. At an inflation rate of 8 per cent the unemployment rate is

A) 2 per cent.
B) 5 per cent.
C) 6 per cent.
D) 4 per cent.
E) There is not enough information to say.

Answer 2

2 per cent.

Question 3

Okun's Law says that the difference between the unemployment rate and the natural unemployment rate determines

A) real GDP.
B) the real interest rate.
C) potential GDP.
D) the gap between the inflation rate and the unemployment rate.
E) the gap between potential GDP and real GDP.

Answer 3

the gap between potential GDP and real GDP.

Question 4

The short-run tradeoff between the unemployment rate and the inflation rate shown by the Phillips curve is represented in the AS-AD model by

A) the vertical potential GDP line.
B) the upward-sloping aggregate supply curve.
C) rightward shifts of the aggregate supply curve.
D) leftward shifts of the aggregate supply curve.
E) the downward-sloping aggregate demand curve.

Question 5

Suppose the unemployment rate is 8 per cent and the natural unemployment rate is 6 per cent. If potential GDP is $8 trillion, using Okun's Law what does real GDP equal?

A) $7.84 trillion
B) $8.16 trillion
C) $7.68 trillion
D) $8.32 trillion
E) $8.00 trillion

Question 6

If the economy is at full employment, then the unemployment rate

A) is greater than the natural unemployment rate.
B) is below the natural unemployment rate.
C) is equal to the natural unemployment rate.
D) can be anywhere on a short-run Phillips curve.
E) is equal to zero.

Question 7

According to Okun's Law, when the natural employment rate is 6 per cent and potential GDP is $10 trillion, then when actual employment is 5 percent, real GDP is

A) $8 trillion.
B) $10.1 trillion.
C) $9.8 trillion.
D) $10.2 trillion.
E) $9.9 trillion.

Question 8

When the aggregate demand curve shifts,

A) the inflation rate does not change.
B) there is a change in the natural unemployment rate.
C) there is a movement along the short-run Phillips curve.
D) there is a change in potential GDP.
E) the short-run Phillips curve shifts.

Question 9

According to Okun's Law, if the unemployment rate is 7 per cent and the natural unemployment rate is 5 per cent, potential GDP is ________ than real GDP.

A) 4 per cent greater
B) 4 per cent less
C) 7 per cent less
D) 2 per cent less
E) 2 per cent greater

Question 10

Along a short-run Phillips curve, the

A) short-run cost of higher inflation is a higher real interest rate.
B) long-run cost of lower inflation is higher unemployment.
C) short-run cost of lower inflation is higher interest rates.
D) short-run cost of lower unemployment is higher inflation.
E) short-run benefit of lower unemployment is lower inflation.

Question 11

The short-run Phillips curve is ________ curve along which an increase in the unemployment rate is associated with ________ in the inflation rate.

A) an upward-sloping; an increase
B) a vertical; no change
C) a downward-sloping; no change
D) a downward-sloping; a decrease
E) a horizontal; no change

Question 12

Comparing the aggregate supply curve and the short-run Phillips curve, we see that they

A) each describe different parts of the economy.
B) both exist because the real wage rate is fixed in the short run.
C) both exist since money wages are flexible.
D) both exist because the money wage rate is fixed in the short run.
E) describe the same phenomena but contradict each other.

Question 13

The short-run Phillips curve shows the relationship between the

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

Question 14

The curve shown in the figure above is the

A) aggregate demand curve.
B) demand for money curve.
C) aggregate supply curve.
D) Phillips curve.
E) potential GDP curve.

Question 15

Comparing the AS-AD model and the Phillips curve, we see that

A) they are both graphed as a relationship between the rate of inflation and the unemployment rate.
B) the Phillips curve is graphed as a relationship between the price level and the unemployment rate.
C) the AS-AD model uses the price level and the Phillips curve uses the rate of inflation.
D) the AS-AD model is graphed as a relationship between the inflation rate and the rate of real GDP.
E) the AS-AD model uses the price level and the Phillips curve uses real GDP.

Question 16

If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

A) 0.02 per cent.
B) 100 per cent.
C) 2.0 per cent.
D) 102 per cent.
E) unable to be determined without knowing potential GDP.

Question 17

According to Okun's Law, for each 1 percentage point that the unemployment rate is above the natural unemployment rate, then

A) the inflation rate is greater than the expected inflation rate by 2 percentage points.
B) the inflation rate is less than the expected inflation rate by 1 percentage point.
C) real GDP is above potential GDP by 2 per cent.
D) real GDP is below potential GDP by 2 per cent.
E) the real interest rate is below the natural real interest rate by 1 percentage point.

Question 18

If the economy is on its short-run Phillips curve at the natural unemployment rate then, in the AS-AD model, real GDP is definitely

A) equal to potential GDP.
B) greater than potential GDP.
C) less than potential GDP.
D) increasing.
E) decreasing.

Question 19

The figure above shows the Phillips curve for an economy. At an unemployment rate of 5 per cent the inflation rate is

A) 6 per cent.
B) 5 per cent.
C) 4 per cent.
D) 2 per cent.
E) There is not enough information to say.

Question 20

Suppose the natural unemployment rate is 5 per cent, the actual unemployment rate is 6 per cent, and potential GDP is $500 billion. Based on Okun's Law, real GDP is equal to ________ billion.

A) $490
B) $510
C) $400
D) $500
E) $590

Question 21

At full employment, the expected inflation rate is

A) higher than the inflation rate.
B) equal to the inflation rate.
C) unknown.
D) unrelated to the inflation rate.
E) lower than the inflation rate.

Question 22

Comparing the short-run Phillips curve and the long-run Phillips curve, we see that there is

A) only a long-run tradeoff between inflation and unemployment but not a short-run tradeoff.
B) no relationship between the two curves.
C) only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff.
D) no tradeoff in either curve.
E) a tradeoff in both curves.

Question 23

If aggregate demand decreases, the

A) short-run Phillips curve shifts rightward.
B) short-run Phillips curve does not shift nor is there a movement along it.
C) economy moves to a lower inflation rate along its short-run Phillips curve.
D) economy moves to a higher inflation rate along its short-run Phillips curve.
E) short-run Phillips curve shifts leftward.

Question 24

In the long run, the unemployment rate

A) is zero.
B) is equal to the expected unemployment rate.
C) must be equal to the expected inflation rate.
D) is equal to the natural unemployment rate.
E) can take on any value.

Question 25

In the figure above, the natural unemployment rate is

A) 4 per cent.
B) 6 per cent.
C) 8 per cent.
D) 0 per cent.
E) 2 per cent.

Question 26

On the long-run Phillips curve, the unemployment rate

A) and inflation rate can take any value.
B) can be any value, but the inflation rate equals the expected inflation rate.
C) equals the natural unemployment rate, and the inflation rate equals the expected inflation rate.
D) equals the natural unemployment rate, but the inflation rate can be any value.
E) decreases when the inflation rate increases.

Question 27

The short-run Phillips curve shows ________ between the unemployment rate and the inflation rate, and the long-run Phillips curve shows ________ between the unemployment rate and the inflation rate.

A) no relationship; no relationship
B) no relationship; a negative relationship
C) a negative relationship; a positive relationship
D) a positive relationship; a negative relationship
E) a negative relationship; no relationship

Question 28

If aggregate demand increases, thereby leading to an increase in real GDP and inflation, there is

A) a leftward shift in the short-run Phillips curve.
B) a movement downward along the short-run Phillips curve.
C) a rightward shift in the short-run Phillips curve.
D) a movement upward along the short-run Phillips curve.
E) neither a movement along nor a shift in the short-run Phillips curve.

Question 29

In order to keep the real wage rate constant, the

A) money wage rate must increase when the price level falls.
B) inflation rate must be exactly one half of the expected inflation rate.
C) money wage rate must increase by the same amount as the inflation rate.
D) money wage rate must decrease by the same amount as the inflation rate.
E) nominal interest rate must be equal to the inflation rate.

Question 30

The long-run Phillips curve is ________ curve and, moving along the long-run Phillips curve, an increase in the inflation rate is associated with ________ in the natural unemployment rate.

A) a downward-sloping; a decrease
B) a vertical; no change
C) an upward-sloping; an increase
D) a downward-sloping; no change
E) a horizontal; no change

Question 31

The long-run Phillips curve indicates that

A) any inflation rate is possible at the natural unemployment rate.
B) any unemployment rate is possible at the natural inflation rate.
C) there is a tradeoff between the inflation rate and the unemployment rate in the long run.
D) potential GDP can never be achieved.
E) there is no way to control the inflation rate in the long run.

Question 32

When the aggregate demand curve shifts rightward, the price level ________ and the unemployment rate ________.

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

Question 33

In the short run, a decrease in aggregate demand will lead to

A) an increase in the price level and a decrease in real GDP.
B) an increase in the price level and an increase in real GDP.
C) a decrease in the price level and an increase in the unemployment rate.
D) a decrease in the price level and an increase in real GDP.
E) no change in the price level and a decrease in real GDP.

Question 34

The short-run Phillips curve shows only a short-run tradeoff between the unemployment rate and the inflation rate because in the long run, the

A) inflation rate returns to the natural inflation rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate.
B) inflation rate returns to the natural inflation rate and the unemployment rate returns to the natural unemployment rate.
C) unemployment rate returns to the natural unemployment rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate.
D) natural unemployment rate increases.
E) expected inflation rate increases.

Question 35

If the economy is at full employment, then the inflation rate

A) exceeds the expected inflation rate.
B) is equal to zero.
C) can be anywhere on a short-run Phillips curve.
D) is less than the expected inflation rate.
E) is equal to the expected inflation rate.

Question 36

In the figure above, the expected inflation rate is

A) 0 per cent.
B) 4 per cent.
C) 6 per cent.
D) 2 per cent.
E) 8 per cent.

Question 37

Data from the United States and the United Kingdom show that the short-run Phillips curve exhibits

A) stability with shifts occurring only when external forces are strong.
B) positive slopes in both nations.
C) a great deal of shifting.
D) stability with shifts occurring only when there is an internal change of government.
E) shifts that occur every five years or so.

Question 38

The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is ________, which demonstrates that changes in the inflation rate ________ effect on unemployment.

A) vertical; have an
B) an upward-sloping straight line with a 45° slope; have an
C) vertical; have no
D) horizontal; have no
E) a downward-sloping straight line with a 45° slope; have an

Question 39

The lack of a long-run tradeoff between the unemployment rate and the inflation rate means the long-run Phillips curve is

A) downward sloping.
B) vertical.
C) horizontal.
D) upward sloping.
E) U-shaped, with higher inflation initially decreasing unemployment and then increasing it back to the natural unemployment rate.

Question 40

The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the economy is

A) away from potential GDP.
B) in recession.
C) at full employment.
D) in expansion.
E) at full inflation.

Question 41

Based on the above table, if the current price level is 100 and the natural unemployment rate is 5 per cent, what is the expected inflation rate?

A) 2 per cent
B) 8 per cent
C) 3 per cent
D) 12 per cent
E) 5 per cent

Question 42

The figure above shows some Phillips curves for an economy.
In the figure above, the shift from the short-run Phillips curve SRPC₀ and the long-run Phillips curve LRPC₀ to the short-run Phillips curve SRPC₁ and the long-run Phillips curve LRPC₁ is the result of ________ in the expected inflation rate and ________ in the natural unemployment rate.

A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) an increase; no change
E) a decrease; no change

Question 43

The figure above shows some Phillips curves for an economy.
The short-run Phillips curve in the figure above shifts from SRPC₀ to SRPC₁ as a result of

A) an increase in the natural unemployment rate.
B) a fall in the expected inflation rate.
C) a decrease in the natural unemployment rate.
D) a rise in the expected inflation rate.
E) None of the above answers is correct.

Question 44

The figure above shows some Phillips curves for an economy.
In the figure above, the shift from the short-run Phillips curve SRPC₀ and the long-run Phillips curve LRPC₀ to the short-run Phillips curve SRPC₂ and the long-run Phillips curve LRPC₂ is the result of ________ in the expected inflation rate and ________ in the natural unemployment rate.

A) a decrease; a decrease
B) a decrease; an increase
C) no change; a decrease
D) an increase; no change
E) an increase; an increase

Question 45

Due to a "baby bust" in the 1960s and 1970s, fewer people entered the labour market in the 1980s and 1990s. This demographic event ________ the natural unemployment rate thereby shifting the short-run Phillips curve ________ and shifting the long-run Phillips curve ________.

A) decreased; leftward; leftward
B) increased; leftward; rightward
C) increased; rightward; rightward
D) increased; rightward; leftward
E) decreased; rightward; rightward

Question 46

The short-run Phillips curve tradeoff becomes less favourable if either

A) potential GDP or the natural unemployment rate decreases.
B) potential GDP or the natural unemployment rate increases.
C) the expected inflation rate increases or the natural unemployment rate decreases.
D) the level of real GDP decreases or the natural unemployment rate decreases.
E) the expected inflation rate or the natural unemployment rate increases.

Question 47

Suppose an economy experiences a permanent increase in its expected inflation rate. As a result, there is

A) a downward shift of the short-run Phillips curve.
B) a downward movement along the short-run Phillips curve.
C) no change at all to the short-run Phillips curve.
D) an upward movement along the short-run Phillips curve.
E) an upward shift of the short-run Phillips curve.

Question 48

According to the natural rate hypothesis, if the economy begins at full employment with an unemployment rate of 5 per cent and then the inflation rate increases from 2 per cent to 4 per cent, then the economy will

A) stay at the 4 per cent inflation rate and the natural unemployment rate will fall.
B) not see any lower unemployment, even temporarily, just higher inflation.
C) have lower unemployment but then return to its natural rate with an inflation rate of 4 per cent.
D) eventually return to its natural rate of 2 per cent inflation and its natural unemployment rate of 5 per cent.
E) eventually return to its natural rate of 2 per cent inflation and a new lower unemployment rate.

Question 49

The figure above shows some Phillips curves for an economy.
Along the short-run Phillips curve SRPC₀ in the figure above, the natural unemployment rate is

A) 6 per cent.
B) 8 per cent.
C) 3 per cent.
D) 4 per cent.
E) an amount that can be determined from the figure but none of the above answers is correct.

Question 50

Changes in which of the following do NOT affect the natural unemployment rate?

A) The birth rate or other demographic data
B) The minimum wage
C) The quantity of money
D) Structural change
E) Unemployment benefits

Question 51

Based on the above table, if the current price level is 100 and the unemployment rate is 4 per cent, then the

A) inflation rate is 108 per cent.
B) inflation rate is 8 per cent.
C) inflation rate is 2.8 per cent.
D) expected inflation rate is 8 per cent.
E) expected inflation rate is 2.8 per cent.

Question 52

The natural rate hypothesis concludes that when the inflation rate increases, then, in the short run, there is

A) an upward shift of the short-run Phillips curve.
B) a downward shift of the short-run Phillips curve.
C) an upward movement along the short-run Phillips curve.
D) a downward movement along the short-run Phillips curve.
E) no change at all in the short-run Phillips curve.

Question 53

The shifts of the short-run and long-run Phillips curves in the figure above are the result of

A) a decrease in the natural unemployment rate.
B) an increase in the natural unemployment rate.
C) an increase in the actual inflation rate.
D) an increase in the expected inflation rate.
E) a decrease in the expected inflation rate.

Question 54

The figure above shows some Phillips curves for an economy.
Along the short-run Phillips curve SRPC₂ in the figure above, the natural unemployment rate is

A) 6 per cent.
B) 4 per cent.
C) 3 per cent.
D) 8 per cent.
E) an amount that can be determined from the figure but none of the above answers is correct.

Question 55

The figure above shows some Phillips curves for an economy.
Along the short-run Phillips curve SRPC₀ in the figure above, the natural unemployment rate is

A) 7 per cent.
B) 6 per cent.
C) 3 per cent.
D) an amount that can be determined from the figure, but none of the above answers is correct.
E) an amount that cannot be determined from the figure.

Question 56

The shift of the short-run Phillips curve in the figure above is the result of

A) an increase in the expected inflation rate.
B) an increase in the natural unemployment rate.
C) a decrease in the actual inflation rate.
D) a decrease in the natural unemployment rate.
E) a decrease in the expected inflation rate.

Question 57

The natural rate hypothesis asserts that

A) when prices change, the inflation rate changes temporarily and then returns to its natural rate.
B) price changes occur at a natural rate, near a 6 per cent average inflation rate.
C) changes in the unemployment rate are natural and long-lasting.
D) changes in the natural unemployment rate are only temporary.
E) changes in the unemployment rate from changes in the inflation rate are temporary.

Question 58

Both the long-run and the short-run Phillips curves shift if

A) expected real GDP changes.
B) the expected inflation rate changes.
C) the natural unemployment rate changes.
D) the expected unemployment rate changes.
E) the actual inflation rate changes.

Question 59

When the natural unemployment rate increases,

A) there are no shifts of either the long-run Phillips curve or the short-run Phillips curve.
B) both the long-run Phillips curve and the short-run Phillips curve shift leftward.
C) the long-run Phillips curve shifts rightward, and the short-run Phillips curve shifts leftward.
D) both the long-run Phillips curve and the short-run Phillips curve shift rightward.

Question 60

The figure above shows some Phillips curves for an economy.
Along the short-run Phillips curve SRPC₀ in the figure above, the expected inflation rate is

A) 6 per cent.
B) 3 per cent.
C) 7 per cent.
D) an amount that can be determined from the figure, but none of the above answers is correct.
E) an amount that cannot be determined from the figure.

Question 61

If the Reserve Bank lowers the inflation rate and initially expected inflation does not change, in the short run the unemployment rate ________, and in the long run the unemployment rate ________ the natural unemployment rate.

A) falls; is equal to
B) rises; is greater than
C) does not change; is greater than
D) rises; is equal to
E) does not change; is equal to

Question 62

A country reports that its inflation rate and unemployment rate have both increased. These changes could be the result of

A) a movement downward along the short-run Phillips curve.
B) a leftward shift of the long-run Phillips curve.
C) a downward shift of the short-run Phillips curve.
D) a movement upward along the short-run Phillips curve.
E) an upward shift of the short-run Phillips curve.

Question 63

If the Reserve Bank tries to lower the unemployment rate so it is lower than the natural unemployment rate, in the short run before the expected inflation rate changes, the SRPC ________ and the LRPC ________.

A) does not change; does not change
B) shifts downward; shifts leftward
C) shifts upward; does not change
D) does not change; shifts rightward
E) shifts downward; does not change

Question 64

If the inflation that results from targeting unemployment becomes unacceptably high, low inflation can be restored. Lower inflation can be obtained by ________ the growth rate of aggregate demand, by ________ money growth and by ________ interest rates.

A) raising; slowing; raising
B) lowering; accelerating; lowering
C) lowering; accelerating; raising
D) lowering; slowing; raising
E) lowering; slowing; lowering

Question 65

In the short run, an increase in inflation initiated by the Reserve Bank and not matched by an increase in the expected inflation rate results in ________ in the long-run Phillips curve and ________ in the short-run Phillips curve.

A) a rightward shift; a downward shift
B) a rightward shift; an upward shift
C) no change; a downward shift
D) no change; no change
E) a leftward shift; an upward shift

Question 66

If the Reserve Bank decides that it wants to lower the unemployment rate, it ________ the growth rate of aggregate demand by ________ the growth rate of money and ________ interest rates.

A) accelerates; accelerating; raising
B) reduces; accelerating; lowering
C) accelerates; accelerating; lowering
D) accelerates; reducing; lowering
E) accelerates; reducing; raising

Question 67

A major factor in determining the rational expectation of inflation is

A) forecasts of the Reserve Bank's monetary policy.
B) the recent past behaviour of the stock market.
C) the size of the budget deficit.
D) forecasts of fiscal policy.
E) the previous month's unemployment rate.

Question 68

A rational expectation of the inflation rate is

A) an expected inflation rate between 1 per cent and 5 per cent.
B) always correct.
C) a forecast based on the forecasted actions of the Reserve Bank and other relevant determinant factors.
D) an expected inflation rate between 5 per cent and 10 per cent.
E) a forecast based only on the historical evolution of inflation over the last 100 years.

Question 69

The natural rate hypothesis asserts that in the ________, the money wage rate is fixed and the ________ in the inflation rate brings a(n) ________ in the unemployment rate.

A) short run; increase; decrease
B) short run; decrease; increase
C) short run; increase; increase
D) short run; decrease; decrease
E) long run; increase; decrease