Deck 33: The Trade-Off Between Inflation and Unemployment

Question 1

The short-run relationship between inflation and unemployment is often called as the Phillips curve.

Answer 1

True

Question 2

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and decreases unemployment.

Answer 2

True

Question 3

Supply-side inflation is the rise in price level caused by slow growth (or decline) of aggregate supply.

Answer 3

True

Question 4

If, in the long run, people adjust their price expectation so that all prices and incomes move proportionately to an increase in the price level, then the long-run Phillips curve is vertical.

Question 5

Demand-side inflation is the rise in inflation caused by rapid growth of aggregate demand.

Question 6

Along a short-run Phillips curve, a higher rate of inflation is associated with a lower unemployment rate.

Question 7

Demand-side inflation is usually accompanied by increasing real GDP, while supply-side inflation is usually accompanied by falling real GDP.

Question 8

An economy eliminates a recessionary gap by reducing wages and prices.

Question 9

The Phillips curve assumes that shocks to the economy come from the demand side.

Question 10

Economist A.W.Phillips found a negative correlation between wage inflation and unemployment.

Question 11

A supply shock is an event that directly alters firms' costs and prices, shifting the economy's aggregate supply and thus the Phillips curve.

Question 12

If fluctuations in economic activity emanate from the supply side, higher rates of inflation will be associated with higher rates of unemployment, and lower rates of inflation will be associated with lower rates of unemployment.

Question 13

The U.S.economy in the 1990s benefited from an aggregate supply curve shifting outward.

Question 14

If aggregate demand grows faster than aggregate supply, the equilibrium price level will rise.

Question 15

The economy's self-correcting mechanism ensures that neither recessionary nor inflationary gaps will be eliminated eventually.

Question 16

The cost of reducing unemployment more rapidly by expansionary fiscal and monetary policies is a permanently higher inflation rate.

Question 17

A vertical long-run Phillips curve is a vertical straight line at the natural rate of unemployment.

Question 18

The economy's self-correcting mechanism refers to the way money wages react to either a recessionary gap or an inflationary gap.

Question 19

If workers can see inflation coming, and if they receive compensation for it, then inflation does not erode real wages.

Question 20

Natural rate of unemployment is the normal rate of unemployment toward which the economy gravitates.

Question 21

European governments accepted prolonged periods of unemployment in the 1990s in order to reduce inflation.

Question 22

Keynesian economists generally agree that unemployment is more costly than inflation.

Question 23

Inflationary gaps lead to rising unemployment and rising inflation.

Question 24

Rational expectations are forecasts that, although not necessarily correct, are the best that can be made given the available information.

Question 25

Most economists and policymakers decided in 2007-2010 that reducing unemployment was the main national priority.

Question 26

Recessionary gaps lead to falling inflation and falling unemployment.

Question 27

If fluctuations in economic activity emanate from the supply side, higher rates of inflation will be associated with higher rates of unemployment, and lower rates of inflation will be associated with lower rates of unemployment.

Question 28

In the long run, the unemployment rate is independent of inflation, and the Phillips curve is vertical at the natural rate of unemployment.

Question 29

The short-run aggregate supply curve is vertical when inflation is predicted accurately.

Question 30

To make rational forecasts, your predictions do not have to be correct all of the time.

Question 31

If expectations are rational, forecasting errors are pure random numbers.

Question 32

The short-run aggregate supply curve is upward sloping when inflation is underestimated.

Question 33

According to the Phillips curve, in the short run, if policymakers choose an expansionary policy to lower the rate of unemployment, the economy will experience an increase in inflation.

Question 34

An example of indexing is a "cost of living" adjustment clause in a wage contract.

Question 35

There is no long-run trade-off between inflation and unemployment.

Question 36

One explanation for the increase in the natural rate of unemployment in 2010 was a mismatch between the skills of the American labor force and the skills that the modern job market demanded.

Question 37

Rational expectations are the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future.

Question 38

Indexing seeks to reduce the social costs of inflation.

Question 39

Inflation targeting requires monetary policymakers to rely heavily on the Phillips curve.

Question 40

If expectations are rational, inflation can be reduced without a period of high unemployment.

Question 41

If economic fluctuations originate on the supply side,

A)there will be no relationship between unemployment and inflation.
B)real wage increases will be necessary to eliminate unemployment.
C)inflation and unemployment will be negatively related.
D)inflation and unemployment will be positively related.

Question 42

Restricting demand will lower inflation but

A)aggravate the unemployment problem.
B)reduce the unemployment rate.
C)have no impact on the unemployment rate.
D)None of the above is correct.

Question 43

Inflation can be caused by rapid growth of aggregate demand or by sluggish growth of aggregate supply.

Question 44

The economy's self-correcting mechanism

A)tends to push unemployment toward a specific point called the natural rate of unemployment.
B)works better at correcting inflationary gaps than recessionary gaps.
C)cannot work if the Phillips curve is vertical.
D)ensures that the economy will not have to endure a long period of high unemployment.

Question 45

Demand-side inflation differs from supply-side inflation in which of the following ways?

A)Demand-side inflation has higher output; supply-side inflation has lower output.
B)Demand-side inflation has lower output; supply-side inflation has higher output.
C)Demand-side inflation is always followed by stagflation; supply-side inflation is always followed by demand-side inflation.
D)Demand-side inflation has a self-correcting mechanism; supply-side inflation does not.

Question 46

Figure 33-2
​
Given the situation in graph (1) in Figure 33-2, what action could be expected from the economy's self-correcting mechanism?

A)An increase in aggregate demand
B)A decrease in aggregate demand
C)An increase in aggregate supply
D)A decrease in aggregate supply

Question 47

Reducing aggregate demand to fight inflation will cause higher unemployment.

Question 48

Stimulating demand will improve the unemployment picture but

A)worsen inflation.
B)decrease inflation.
C)have no impact on inflation.
D)None of the above is correct.

Question 49

Figure 33-1
​
Which of the following is true about the economy depicted in Figure 33-1?

A)Economy is experiencing supply-side inflation.
B)Policymakers have chosen to fight inflation rather than unemployment.
C)The increase in aggregate demand has increased prices but not real GDP.
D)The slope of the aggregate supply curve embodies the trade-off between unemployment and inflation.

Question 50

If people have ________________, an announced monetary contraction by the Fed that is credible could reduce inflation with little or no increase in inflation.

A)rational expectations
B)irrational expectations
C)no expectations
D)None of the above is correct.

Question 51

Figure 33-2
​
Given the situation in graph (1) in Figure 33-2, what movement would be expected in graph (2) from the economy's self-correcting mechanism?

A)A to B
B)A to D
C)C to E
D)D to C

Question 52

Which of the following could trigger supply-side inflation?

A)A decrease in the wage rate for all workers
B)An increase in raw materials' prices
C)An increase in the productivity of capital
D)An increase in the labor force

Question 53

Stimulating aggregate demand to reduce unemployment will aggravate inflation.

Question 54

Figure 33-3
​
Given the situation in graph (1) in Figure 33-3, what movement would be expected in graph (2) from the economy's self-correcting mechanism?

A)A to B
B)A to D
C)C to E
D)D to C

Question 55

Stagflation can be defined as a situation characterized by

A)rising prices and rising output.
B)rising prices and falling output.
C)falling prices and falling output.
D)falling prices and rising output.

Question 56

Which of the following could trigger demand-side inflation?

A)A decrease in the money supply
B)An increase in taxes
C)An increase in government spending
D)An increase in interest rates

Question 57

Figure 33-3
​
Given the situation in graph (1) in Figure 33-3, what can be expected to change in graph (1) when the economy's self-correcting mechanism operates?

A)Aggregate demand increases.
B)Aggregate demand decreases.
C)Aggregate supply increases.
D)Aggregate supply decreases.

Question 58

The economy's self-correcting mechanism to eliminate a recessionary gap relies on

A)falling interest rates that shift the aggregate demand curve outward.
B)falling wage rates that shift the aggregate supply curve outward.
C)rising wage rates that shift the aggregate supply curve inward.
D)increases in the price level that shift the aggregate supply curve inward.

Question 59

Figure 33-1
​
Which of the following is true about the economy depicted in Figure 33-1?

A)Tax incentives are being used to stimulate aggregate supply.
B)Policymakers believe the costs of unemployment are higher than the costs of inflation.
C)Contractionary monetary policy is being enacted to fight inflation.
D)Prices are rising but real GDP is falling.

Question 60

What is the crucial difference between inflation generated on the demand side versus inflation generated on the supply side?

A)Demand-side inflation is short-lived, while supply-side inflation lasts for a long time.
B)Demand-side inflation leads to budget surpluses, while supply-side inflation contributes to budget deficits.
C)Supply-side inflation is subject to the control of policymakers, while demand-side inflation is beyond their reach.
D)Demand-side inflation is normally accompanied by rising real GDP, while supply-side inflation may be accompanied by falling real GDP.

Question 61

If AD and AS increase at exactly the same rate, the result will be

A)demand-side inflation.
B)supply-side inflation.
C)falling prices.
D)stable prices.

Question 62

During the 1960s and early 1970s, economists believed that the Phillips curve indicated

A)that higher inflation was the price for more unemployment.
B)that higher levels of employment could be achieved with lower inflation.
C)a menu of choices for policymakers.
D)All of these responses are correct.

Question 63

Which of the following observations concerning the Phillips curve is not true?

A)They are normally upward-sloping.
B)They are more commonly constructed for price inflation.
C)They depict the inverse relation between wage inflation and unemployment.
D)They depict the rate of unemployment on the horizontal axis.

Question 64

The Phillips curve shows the relationship between

A)the rate of inflation and the rate of unemployment.
B)the rate of growth of real GDP and the rate of unemployment.
C)real prices and real GDP.
D)the rate of inflation and the rate of growth of real GDP.

Question 65

An increase in the price of foreign oil can shift the economy's aggregate supply curve _____ resulting in inflation.

A)inward
B)outward
C)along the curve
D)None of the above is correct.

Question 66

A decrease in AS will trigger less inflation under which of the following conditions?

A)AD is relatively steep.
B)AD is relatively flat.
C)AS is relatively steep.
D)AS is relatively flat.

Question 67

If AD increases at a faster rate than AS, the result will be

A)demand-side inflation.
B)supply-side inflation.
C)falling prices.
D)stable prices.

Question 68

A reduction in the rate of inflation is known as

A)disinflation.
B)deflation.
C)inflation.
D)None of the above is correct.

Question 69

If AS increases at a faster rate than AD, the result will be

A)demand-side inflation.
B)supply-side inflation.
C)falling prices.
D)stable prices.

Question 70

The unemployment rate for the U.S.economy in 2014 averaged about

A)10.2 percent.
B)8.5 percent.
C)6.5 percent.
D)4 percent.

Question 71

A scatter diagram of the position of the U.S.economy from 1972 through 2007 with the price level on the vertical axis and real GDP on the horizontal axis would show a movement generally toward the

A)northwest.
B)northeast.
C)southwest.
D)southeast.

Question 72

Which of the following is most likely to result in unemployment?

A)Aggregate demand grows more rapidly than aggregate supply.
B)Aggregate demand and aggregate supply grow at the same rate.
C)Aggregate supply grows more rapidly than aggregate demand.
D)Neither aggregate demand nor aggregate supply grows at all.

Question 73

An increase in AD will trigger less inflation under which of the following conditions?

A)AD is relatively steep.
B)AD is relatively flat.
C)AS is relatively steep.
D)AS is relatively flat.

Question 74

On the vertical axis, the Phillips curve depicts the

A)the rate of unemployment.
B)rate of inflation.
C)rate of growth of nominal GDP.
D)rate of growth of real GDP.

Question 75

Aggregate demand grows because

A)patent laws protect and stimulate new inventions.
B)there is more machinery and technology improvement.
C)the government increases its spending, a growing population increases consumer spending, and the Fed increases the money supply.
D)All of these responses are correct.

Question 76

A study of the U.S.price level and real GDP from 1972 to 2007 reveals a clear upward march toward higher prices and greater output.What explains this?

A)Both the aggregate demand curve and the aggregate supply curve have shifted to the left year after year.
B)Both the aggregate demand curve and the aggregate supply curve have shifted to the right year after year.
C)The aggregate supply curve has shifted to the right, while the aggregate demand curve has shifted to the left.
D)The aggregate supply curve has shifted to the left, while the aggregate demand curve has shifted to the right.

Question 77

If aggregate demand had grown faster than it did from 2009 to 2010, then the U.S.economy would have experienced

A)higher unemployment and higher inflation.
B)lower unemployment and lower inflation.
C)higher unemployment and lower inflation.
D)lower unemployment and higher inflation.

Question 78

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate demand increases, then data would show

A)a cyclical relationship between inflation and unemployment.
B)a direct relationship between inflation and unemployment.
C)an inverse relationship between inflation and unemployment.
D)no relationship between inflation and unemployment.

Question 79

A movement from an upper point to a lower point on the Phillips curve shows

A)decrease in the inflation and decrease in the unemployment.
B)increase in the inflation and decrease in the employment.
C)increase in the inflation and increase in the employment.
D)decrease in the inflation and increase in the unemployment.

Question 80

A decrease in the price of foreign oil will affect the U.S.economy by

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