Deck 13: Unemployment and Inflation

Question 1

Which of the following represents the expectations-augmented Phillips curve?

A)Anticipated inflation rate is proportional to the cyclical unemployment rate.
B)Unanticipated inflation rate is proportional to the cyclical unemployment rate.
C)Unanticipated inflation rate is proportional to unemployment rate.
D)Anticipated inflation rate is proportional to unemployment rate.

Answer 1

Unanticipated inflation rate is proportional to the cyclical unemployment rate.

Question 2

Milton Friedman and Edmund Phelps questioned

A)the use of expectations in the Phillips curve.
B)the stability of the relationship between inflation and unemployment.
C)the existence of a natural rate of unemployment.
D)the existence of a full-employment level of output.

Answer 2

the stability of the relationship between inflation and unemployment.

Question 3

The employment insurance has increased the size of the benefit to unemployed.This will cause

A)the natural rate of unemployment to increase and the Phillips curve to shift left.
B)the expected inflation to increase and the Phillips curve to shift left.
C)the natural rate of unemployment to increase and the Phillips curve to shift right.
D)the expected inflation to decrease and the Phillips curve to shift left.

Answer 3

the natural rate of unemployment to increase and the Phillips curve to shift right.

Question 4

In the extended classical model,an anticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

A)increase;increase
B)increase;not change
C)not change;increase
D)decrease;increase

Question 5

The negative relationship between unemployment and inflation is known as the

A)aggregate supply curve.
B)aggregate demand curve.
C)Phillips curve.
D)efficiency wage line.

Question 6

According to the expectations-augmented Phillips curve,

A)If inflation rate is zero,unemployment rate will be zero.
B)If unanticipated inflation rate is zero,unemployment rate will be zero.
C)If unanticipated inflation rate is zero,cyclical unemployment rate will be zero
D)If unanticipated inflation rate is zero,cyclical unemployment rate will be negative.

Question 7

In the extended classical model,an unexpected decrease in aggregate demand would cause unanticipated inflation to be ________ and cyclical unemployment to be ________.

A)positive;negative
B)positive;positive
C)negative;negative
D)negative;positive

Question 8

Suppose most people had anticipated that inflation would increase by 10% in the coming year because the Central Bank would increase the money supply by 10%.Instead,the Central Bank increases the money supply by only 5%.In the short run,this would cause actual output to be ________ full-employment output and prices to increase by ________ 5%.

A)above;more than
B)above;less than
C)below;more than
D)below;less than

Question 9

Friedman and Phelps argued that the Phillips curve could not be stable because

A)it was not consistent with economic theory.
B)it was not supported by the data.
C)they thought the relationship was between the unanticipated inflation and unemployment.
D)they thought the relationship was between the inflation and cyclical unemployment.

Question 10

The Phillips curve appeared to fit the data well for Canada in the

A)1960s.
B)1970s.
C)1980s.
D)1990s.

Question 11

Which of the following best explains economic theory behind the Phillips curve?

A)If inflation rate is lower than expected inflation rate,real money balance will increase leading to a lower interest rate and a higher aggregate demand and output.
B)If inflation rate is lower than expected inflation rate,real money balance will decrease leading to a higher interest rate and a lower aggregate demand and output.
C)If there is an unanticipated inflation rate,real wage will increase leading to a lower output and employment.
D)If there is an unanticipated inflation rate,real wage will decrease leading to a lower output and employment.

Question 12

In the expectations-augmented Phillips curve π = πᵉ - 3(u - .06.,when π = .06 and πᵉ = .03,the unemployment rate is

A)0.03.
B)0.05.
C)0.07.
D)0.09.

Question 13

Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment,but there should be a stable relationship between

A)anticipated inflation and frictional unemployment.
B)anticipated inflation and cyclical unemployment.
C)unanticipated inflation and frictional unemployment.
D)unanticipated inflation and cyclical unemployment.

Question 14

The Bank of Canada announces that it will increase the money supply by 5 percent for the next five years.This will cause

A)the expected inflation to increase and the Phillips curve to shift right.
B)the expected inflation to decrease and the Phillips curve to shift right.
C)the natural rate of unemployment to decrease and the Phillips curve to shift left.
D)the natural rate of unemployment to increase and the Phillips curve to shift left.

Question 15

The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a

A)given rate of inflation.
B)given expected rate of inflation.
C)given level of unemployment.
D)given expected level of unemployment.

Question 16

In the extended classical model,an unanticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

A)increase;increase
B)increase;not change
C)not change;increase
D)decrease;increase

Question 17

Phillips's research looked at British data on

A)unemployment and inflation.
B)unemployment and nominal wage growth.
C)inflation and nominal wage growth.
D)unemployment and output.

Question 18

Which of the following best describes the original Phillips curve?

A)In the original Phillips curve,the inflation expectation is constant.
B)In the original Phillips curve,the inflation expectation is not constant.
C)In the original Phillips curve,the natural rate of unemployment is constant.
D)Both A and C are correct.

Question 19

In the expectations-augmented Phillips curve π = πᵉ - 3(u - .06),the natural rate of unemployment is

A)0.02.
B)0.03.
C)0.06.
D)18.

Question 20

The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

A)A)W.Phillips.
B)Edmund Phelps.
C)Milton Friedman.
D)Robert Gordon.

Question 21

The long-run Phillips curve is

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question 22

Which of the following forms of unemployment probably imposes the greatest personal costs?

A)frictional unemployment
B)structural unemployment
C)cyclical unemployment
D)voluntary unemployment

Question 23

The Phillips curve shifted during the 1970s primarily because of

A)the two large oil price shocks.
B)the changing demographics of the population.
C)tight monetary policy.
D)easy fiscal policy.

Question 24

The idea that the natural rate of unemployment rises when the actual rate of unemployment rises is known as

A)stabilization.
B)insider-outsider theory.
C)hysteresis.
D)an efficiency wage model.

Question 25

If the expected inflation rate is equal to the actual inflation rate

A)the unemployment rate should be equal to the natural level of unemployment.
B)the unemployment rate should be greater than the natural level of unemployment.
C)the unemployment rate should be less than the natural level of unemployment.
D)the Phillips curve will be unstable.

Question 26

The Lucas critique is an objection to the assumption that

A)inflation is always and everywhere a monetary phenomenon.
B)there is a negative relationship between inflation and unemployment.
C)historical relationships between macroeconomic variables will continue to hold after new policies are in place.
D)people form expectations rationally.

Question 27

The Friedman-Phelps analysis suggests that there is a long-term relationship between

A)inflation and unemployment.
B)cyclical inflation and structural unemployment.
C)unanticipated inflation and cyclical unemployment.
D)anticipated inflation and structural unemployment.

Question 28

Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

A)the cost of retraining workers must be offset against the loss in output that occurs when workers are unemployed.
B)if efficiency wages prevail,and workers are paid their real wage,already employed workers will reduce their effort,reducing output.
C)it ignores the fact that leisure increases during a recession.
D)it ignores the loss of government revenue and additional government expenditures that occur when unemployment rises.

Question 29

Both classicals and Keynesians agree that policymakers

A)can exploit the Phillips curve in the short run.
B)cannot exploit the Phillips curve in the short run.
C)can keep the unemployment rate permanently below the natural rate by permanently running a high rate of inflation.
D)cannot keep the unemployment rate permanently below the natural rate by permanently running a high rate of inflation.

Question 30

One reason for the rise in the natural rate of unemployment is

A)changes in the demographic composition of the work force.
B)the rise in inflation.
C)increased competition from foreign workers.
D)the depreciation of the dollar relative to foreign currencies.

Question 31

Examining data on cyclical unemployment plotted against unanticipated inflation shows

A)a positive relationship.
B)a negative relationship.
C)no significant relationship.
D)a relationship only during the 1960s.

Question 32

Hysteresis in unemployment means

A)many people counted as employed are really underemployed.
B)the natural rate of unemployment changes in response to the actual rate of unemployment.
C)there is no natural rate of unemployment;there is a natural rate of inflation instead.
D)the actual unemployment rises when the natural rate of unemployment rises.

Question 33

If the expected inflation rate is unchanged,a rise in the natural rate of unemployment would

A)shift the Phillips curve to the right.
B)not shift the Phillips curve.
C)shift the Phillips curve to the left.
D)shift the Phillips curve to the left and shift the long-run Phillips curve to the right.

Question 34

If the expected rate of inflation rose at the same time the natural rate of unemployment rose,the Phillips curve

A)would shift down.
B)would shift up.
C)would not move.
D)might shift up or down or not move,depending on which effect was larger.

Question 35

An increase in the expected rate of inflation would

A)shift the Phillips curve upward.
B)shift the Phillips curve downward.
C)shift the long-run Phillips curve to the right.
D)shift the long-run Phillips curve to the left.

Question 36

An adverse supply shock would cause

A)a movement up the short-run Phillips curve.
B)a movement down the short-run Phillips curve.
C)the short-run Phillips curve to shift upward and to the right.
D)the short-run Phillips curve to shift downward and to the left.

Question 37

Classicals argue that an adverse supply shock would

A)raise neither the natural rate of unemployment nor the actual rate of unemployment.
B)raise the actual rate of unemployment,but not the natural rate of unemployment.
C)raise the natural rate of unemployment,but not the actual rate of unemployment.
D)raise both the natural rate of unemployment and the actual rate of unemployment.

Question 38

The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

A)even when expected inflation changes.
B)even when the natural rate of unemployment changes.
C)even if both the expected inflation rate and the natural rate of unemployment change.
D)as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

Question 39

The fact that the long-run Phillips curve is vertical implies that

A)monetary policy can't affect unemployment.
B)money is neutral in the long run.
C)there is a natural rate of inflation.
D)money can't affect inflation in the long run.

Question 40

The argument that when policy changes,people's behaviour changes so that historical relationships between macroeconomic variables will no longer hold is known as

A)the Phillips curve.
B)the policy irrelevance hypothesis.
C)hysteresis.
D)the Lucas critique.

Question 41

Keynesians prefer a disinflation policy of

A)cold turkey.
B)stabilization.
C)gradualism.
D)aggregate demand management.

Question 42

One cost of an unanticipated inflation is that it

A)damages the role of prices as signals in the economy.
B)transfers wealth from borrowers to lenders.
C)decreases menu costs.
D)increases the purchasing power of money.

Question 43

A high-pressure economy is one in which

A)monetary and fiscal policy are used to keep unemployment as low as possible.
B)there is no unemployment insurance,putting pressure on workers to keep their jobs and stay off welfare.
C)wage and price controls prevent firms from raising prices by more than the general price level.
D)the Central Bank tightens monetary policy to force all inflation out of the economy.

Question 44

One cost of an unanticipated inflation is that it

A)transfers wealth from lenders to borrowers.
B)transfers wealth from borrowers to lenders.
C)decreases menu costs.
D)increases the purchasing power of money.

Question 45

A COLA is

A)a centre of labour activity.
B)a cost of living adjustment.
C)a contract on long-term assets.
D)a crisis of labour analysis.

Question 46

The costs of disinflation would be low if

A)expected inflation falls as inflation falls.
B)wage and price controls were used.
C)the Phillips curve were nearly horizontal.
D)the Phillips curve adjusted slowly to changes in inflation.

Question 47

Shoe leather costs refer to

A)the costs of changing prices during inflation.
B)income redistribution cost of inflation.
C)resources used by people to reduce their holdings of currency.
D)resources used by people to reduce their risk.

Question 48

According to the expectations-augmented Phillips curve,if macroeconomic policy succeeds in reducing inflation below its expected rate,unemployment will

A)fall below the natural rate.
B)rise above the natural rate.
C)remain unchanged.
D)be equal to the natural rate.

Question 49

A rapid and decisive reduction in the rate of growth of the money supply for the purpose of disinflation is called

A)a salt water policy.
B)a cold shower policy.
C)gradualism.
D)a cold turkey policy.

Question 50

Which of the following policies will NOT reduce the natural unemployment rate?

A)policies to increase labour market flexibility
B)job training and worker relocation
C)increasing unemployment benefits
D)expansionary policies to reduce actual unemployment rate

Question 51

The cost of disinflation is unemployment.To reduce this cost,

A)money supply should growth faster.
B)government should increase its spending.
C)money supply growth should be rapidly reduced to bring down the expected inflation.
D)government should announce its commitment to the future contractionary fiscal policy,but change it when it is not needed anymore.

Question 52

The insider-outsider theory suggests that

A)insiders get lower wages but higher benefits than outsiders.
B)unemployment insurance leads to higher rates of unemployment.
C)unions seek high wages without causing firms to cut employment.
D)the minimum wage forces low-skilled workers to become unemployed.

Question 53

Which of the following would probably be the most effective at reducing structural unemployment?

A)reduce unemployment benefits
B)provide more information about the availability and location of jobs
C)retrain workers who are unemployed
D)increase union strength in the economy

Question 54

When actual inflation is greater than expected inflation,

A)unemployment rises,according to Phillips-curve analysis.
B)cyclical unemployment rises,according to Phillips-curve analysis.
C)there are transfers from borrowers to lenders.
D)there are transfers from lenders to borrowers.

Question 55

One cost of a perfectly anticipated inflation is that it

A)transfers wealth from lenders to borrowers.
B)transfers wealth from borrowers to lenders.
C)increases menu costs.
D)damages the role of prices as signals in the economy.

Question 56

Hyperinflation occurs when the inflation rate

A)rises.
B)declines.
C)is extremely high.
D)is extremely low.

Question 57

Which of the following statements about inflation is true?

A)Both anticipated and unanticipated inflation are costly.
B)Anticipated inflation is not costly,but unanticipated inflation is costly.
C)Anticipated inflation is costly,but unanticipated inflation is not costly.
D)The cost of anticipated inflation is much higher than that of unanticipated inflation.

Question 58

The reduction of the inflation rate is called

A)deflation.
B)disinflation.
C)unflation.
D)reflation.

Question 59

One cost of a perfectly anticipated inflation is that it

A)transfers wealth from lenders to borrowers.
B)transfers wealth from borrowers to lenders.
C)erodes the value of currency.
D)damages the role of prices as signals in the economy.

Question 60

When there is a hyperinflation,all of the following occur except

A)people spend a lot of time and energy getting rid of currency as fast as possible.
B)the government finds it difficult to collect taxes.
C)markets become inefficient because prices are no longer reliable signals.
D)people make fixed rate loans to protect themselves against inflation.

Question 61

Which one of the following statements is true about the Phillips curve?

A)The short-run Phillips curve is positively sloped while the long-run Phillips curve is vertical.
B)There is no empirical evidence to support the Phillips curve.
C)The short-run Phillips curve is negatively sloped while the long-run Phillips curve is vertical.
D)The Phillips curve is consistent with the Keynesian model but not the Classical model.

Question 62

Ball found that an important factor affecting the sacrifice ratio is

A)the flexibility of the labour market.
B)the shape of the yield curve.
C)the real interest rate.
D)the tightness of fiscal policy.

Question 63

Reducing inflation without incurring serious unemployment costs is possible if

A)policymakers are able to reduce the expected inflation rate.
B)people form their expectations based on rational expectations theory.
C)monetary authorities rapidly decrease the money supply.
D)the government makes a significant budget cut.

Question 64

Countries in which wages adjust rapidly to changes in the supply and demand for labour are likely to have ________ sacrifice ratio.

A)an infinite
B)a high
C)a low
D)a negative

Question 65

In the expectations-augmented Phillips curve,when the expected inflation rate is equal to the actual inflation rate,the economy will be in

A)a recession.
B)a boom.
C)full-employment.
D)a zero natural unemployment rate.

Question 66

The sacrifice ratio is

A)the amount of output lost when the inflation rate is reduced by one percentage point.
B)the percentage reduction in inflation when output falls one percentage point below potential.
C)the percentage change in employment when output declines by one percentage point.
D)the number of percentage points that the unemployment rate rises when output declines by one percentage point.

Question 67

Ball's research showed that the sacrifice ratio

A)was the same for all countries.
B)was nearly zero for most countries.
C)was about 10 for all countries except Canada,where it was about 1.5.
D)varied considerably across countries.

Question 68

Countries in which wages adjust slowly to changes in the supply of and demand for labour are likely to have ________ sacrifice ratio.

A)an infinite
B)a high
C)a low
D)a zero

Question 69

Ball's research on disinflation across different countries found that

A)costs of disinflation were smaller for rapid disinflation than for gradual disinflation.
B)costs of disinflation were larger for rapid disinflation than for gradual disinflation.
C)costs of disinflation were about the same for both rapid and gradual disinflation.
D)costs of disinflation were smaller when the Central Bank had a strong inflation-fighting reputation.

Question 70

The most important factor determining how quickly expected inflation adjusts when the government attempts to reduce inflation is

A)the slope of the Phillips curve.
B)the credibility of the government's disinflationary policy.
C)the degree of gradualism in the government's disinflationary policy.
D)the slope of the IS curve.

Question 71

Which of the following policies does NOT decrease the natural rate of unemployment?

A)tax credits or subsidies for training and relocating unemployed workers
B)lowering consumption taxes
C)lowering payroll taxes
D)using aggressive policy to keep the actual unemployment rate low

Question 72

If a rapid disinflation has a lower sacrifice ratio than a slow disinflation,then reducing inflation is best accomplished by

A)gradualism.
B)increasing money growth.
C)reducing interest rates.
D)a cold-turkey approach.

Question 73

Ball found that the disinflation in Canada had a sacrifice ratio of about

A)0.5
B)1.0
C)1.5
D)2.0

Question 74

Countries in which the government heavily regulates the labour market are likely to have ________ sacrifice ratio.

A)an infinite
B)a high
C)a low
D)a negative

Question 75

Keynesians contend that stabilization policy can offset the output and unemployment effect of unanticipated inflation because

A)nominal wage and price stickiness prevent prices and inflation from adjusting quickly and as a result unemployment sustains.
B)price and inflation expectations do not adjust quickly as claimed by classical economists.
C)nominal wage and price adjust quickly and as a result cyclical unemployment remains zero.
D)price and inflation expectations adjust quickly and employment rises.

Question 76

In what period,did the negative relationship between unemployment and inflation discontinue?

A)1960s.
B)1970s.
C)2000s
D)2010s.

Question 77

The amount of output lost when the inflation rate is reduced by one percentage point is called

A)Okun's law.
B)the sacrifice ratio.
C)the Solow residual.
D)Planck's constant.

Question 78

The expectations-augmented Phillips curve implies that lower inflation is associated with

A)a higher natural rate of unemployment.
B)a lower cyclical unemployment rate.
C)higher inflation expectations.
D)a lower natural rate of unemployment.

Question 79

According to the expectations-augmented Phillips curve,if the cyclical unemployment rate is zero,

A)the inflation rate will be equal to the anticipated inflation rate.
B)the anticipated inflation rate will be negative.
C)the anticipated inflation rate will be positive.
D)the unanticipated inflation rate will be zero.

Question 80

The main determinant of how quickly expected inflation adjusts to changes in monetary policy is

A)the slope of the Phillips curve.
B)the slope of the short-run aggregate supply curve.
C)the credibility of the Central Bank.
D)the degree of indexation in the economy.