Deck 16: The Short-Run Tradeoff Between Inflation and Unemployment

Question 1

In the short run, policy that decreases the aggregate demand also decreases which of the following?

A) the price level
B) the unemployment rate
C) the aggregate supply
D) the natural rate of unemployment

Answer 1

A

Question 2

Which of the following data supported A.W. Phillips' findings?

A) data from 1861-1957 for the United Kingdom
B) data from 1861-1957 for the United States
C) data mostly from the post-World War II period in the United Kingdom
D) data mostly from the post-World War II period in the United States

Answer 2

A

Question 3

Which term refers to the short-run relationship between inflation and unemployment?

A) equity-efficiency tradeoff
B) money neutrality
C) the Phillips curve
D) the Keynesian cross

Answer 3

C

Question 4

What is one determinant of the natural rate of unemployment?

A) the rate of growth of the money supply
B) the generosity of Employment Insurance
C) the expected inflation rate
D) the exchange rate

Question 5

In the long run, what does the inflation rate primarily depend on?

A) the ability of unions to raise wages
B) government spending
C) the money supply growth rate
D) tax rates

Question 6

According to Phillips, which set of two items have a negative relation?

A) output and unemployment
B) output and employment
C) wage inflation and output
D) wage inflation and unemployment

Question 7

What did Phillips discover?

A) a positive relation between unemployment and inflation in the United Kingdom
B) a positive relation between unemployment and inflation in Canada
C) a negative relation between unemployment and inflation in Canada
D) a negative relation between unemployment and inflation in the United Kingdom

Question 8

If policymakers expand aggregate demand, what happens to inflation and unemployment?

A) Inflation falls but unemployment rises.
B) Inflation and unemployment fall.
C) Inflation and unemployment rise.
D) Inflation rises but unemployment falls.

Question 9

If the government raises government expenditures, what happens to prices and unemployment in the short run?

A) Prices rise and unemployment falls.
B) Prices fall and unemployment rises.
C) Prices and unemployment rise.
D) Prices and unemployment fall.

Question 10

If the short-run Phillips curve were stable, what would be unusual?

A) an increase in inflation and an increase in output
B) a decrease in inflation and an increase in unemployment
C) an increase in both inflation and unemployment
D) an increase in output and a decrease in unemployment

Question 11

How is the misery index calculated?

A) It is the inflation rate plus the unemployment rate.
B) It is the unemployment rate minus the inflation rate.
C) It is the actual inflation rate plus the expected inflation rate.
D) It is the natural unemployment rate minus the long-run inflation rate.

Question 12

What is the misery index supposed to measure?

A) the market power of unions
B) the health of the economy
C) the degree of inequality
D) the standard of living

Question 13

Suppose the government decides to decrease the income tax. What is the primary effect of this decision?

A) It decreases unemployment in the long-run.
B) It increases output in the long-run.
C) It decreases the price level in the short-run.
D) It increases inflation in the short-run.

Question 14

Which Canadian economist confirmed the theory of an inflation-unemployment tradeoff?

A) R. Lipsey
B) A.W. Phillips
C) P. Samuelson
D) J. Keynes

Question 15

Who releases the closely watched indicators such as the inflation rate and unemployment each month?

A) Department for Business, Innovation, and Skills
B) Ministry of Finance
C) Department of the Treasury
D) Statistics Canada

Question 16

If policymakers expand aggregate demand, what happens to inflation and unemployment in the long run?

A) Inflation will be higher and unemployment will be lower.
B) Inflation will be higher and unemployment will be unchanged.
C) Inflation and unemployment will be unchanged.
D) Both inflation and unemployment will be higher.

Question 17

If policymakers reduce aggregate demand, what happens to inflation and unemployment?

A) Inflation and unemployment rise.
B) Inflation rises, but unemployment falls.
C) Inflation falls, but unemployment rises.
D) Inflation and unemployment fall.

Question 18

What is a long-run economic aspect on which most economists agree?

A) The natural rate of unemployment depends primarily on the level of aggregate demand.
B) Inflation depends primarily upon the money supply growth rate.
C) There is a direct relationship between the inflation rate and the natural rate of unemployment.
D) The rate of economic growth depends primarily on the growth in money supply.

Question 19

If the short-run Phillips curve were stable, what would be unusual?

A) an increase in government spending and a fall in unemployment
B) an increase in inflation and a decrease in output
C) a decrease in the inflation rate and a rise in the unemployment rate
D) a decrease in output and an increase in unemployment

Question 20

Among other things, what determines the long-run average unemployment rate and inflation, respectively?

A) the market power of unions; government spending
B) efficiency wages; the money supply growth rate
C) the rate of growth of the money supply; the market power of unions
D) the minimum wage; the extent to which firms are competitive

Question 21

When aggregate demand increases, what happens to prices and employment?

A) Prices will fall and unemployment will rise.
B) Prices and unemployment fall.
C) Prices and unemployment rise.
D) Prices will rise and unemployment will fall.

Question 22

What did Samuelson and Solow believe about the Phillips curve?

A) It implied that low unemployment was associated with low inflation.
B) It indicated that the aggregate supply and aggregate demand model was incorrect.
C) It illustrated that policymakers face a tradeoff between inflation and unemployment.
D) It demonstrated that fiscal policies were ineffective in reducing unemployment.

Question 23

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, an increase in taxes moves the economy to where?

A) b and 2
B) d and 3
C) e and 2
D) b and 3

Question 24

Suppose that a central bank increases the money supply. According to the Phillips curve, what should happen to prices, output, and employment?

A) Prices, output, and employment all rise.
B) Prices and output rise, and employment falls.
C) Prices rise, and output and employment fall.
D) Prices fall, and output and employment rise.

Question 25

According to Samuelson and Solow, when aggregate demand is low, how are unemployment, wages, and prices affected?

A) Unemployment is high, so there is upward pressure on wages and prices.
B) Unemployment is high, so there is downward pressure on wages and prices.
C) Unemployment is low, so there is upward pressure on wages and prices.
D) Unemployment is low, so there is downward pressure on wages and prices.

Question 26

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does an increase in government expenditures move the economy?

A) b and 2
B) e and 3
C) d and 3
D) c and 2

Question 27

Which change will move the economy to a point on the Phillips curve where unemployment is lower?

A) lower inflation
B) increased government spending
C) a decrease the money supply
D) higher expectations about inflation

Question 28

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does a decrease in government expenditures move the economy?

A) d and 2
B) d and 3
C) e and 3
D) e and 2

Question 29

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does a decrease in aggregate demand move the economy?

A) a and 2
B) d and 3
C) e and 3
D) a and 3

Question 30

What would we NOT expect to happen if government policy moved the economy up along a given short-run Phillips curve?

A) Ravi reads in the newspaper that the central bank decreased the money supply.
B) Tony gets more job offers.
C) Louis makes larger increases in the prices at his health food store.
D) Jessica's nominal wage increases at a faster rate.

Question 31

Suppose that the money supply increases. According to the Phillips curve model, what are the effects of this policy change?

A) It decreases unemployment in the short run.
B) It decreases inflation in the long run.
C) It decreases unemployment in the long run.
D) It decreases inflation in the short run.

Question 32

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does a decrease in taxes move the economy?

A) d and 2
B) e and 3
C) a and 3
D) b and 2

Question 33

Figure 16-1

Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does a decrease in the money supply growth rate move the economy?

A) e and 1
B) d and 2
C) d and 3
D) a and 3

Question 34

In 1968, economist Milton Friedman published a paper that was critical of the Phillips curve. On what grounds did Friedman criticize the Phillips curve?

A) It seemed to work for wages but not for inflation.
B) Monetary policy was ineffective in combating inflation.
C) The tradeoff illustrated by the Phillips curve did not apply in the long run.
D) Phillips had made errors in collecting his data.

Question 35

Figure 16-1

Refer to Figure 16-1. If the economy starts at c and 1, then in the short run, where does an increase in the money supply move the economy?

A) a and 1
B) b and 2
C) c and 3
D) a and 3

Question 36

According to Samuelson and Solow, when aggregate demand is high, how are unemployment, wages, and prices affected?

A) Unemployment is low, so there is upward pressure on wages and prices.
B) Unemployment is low, so there is downward pressure on wages and prices.
C) Unemployment is high, so there is upward pressure on wages and prices.
D) Unemployment is high, so there is downward pressure on wages and prices.

Question 37

What did Friedman and Phelps argue about the relationship between inflation and unemployment?

A) The inflation rate is related to unemployment in the long-run.
B) The inflation rate is unrelated to unemployment in the long-run.
C) The inflation rate is related to unemployment in the short-run.
D) The inflation rate is unrelated to unemployment in the short-run.

Question 38

In which situation will the economy move to a point on the Phillips curve where unemployment is higher?

A) if the inflation rate increases
B) if the government increases its expenditures
C) if the Bank of Canada decreases the money supply
D) if expected inflation increases

Question 39

In the late 1960s, which of the following was published by economist Edmund Phelps?

A) a paper that argued that there was no long-run tradeoff between inflation and unemployment
B) a paper that disproved Friedman's claim that monetary policy was ineffective in controlling inflation
C) a paper that showed the optimal point on the Phillips curve was at an unemployment rate of 5 percent and an inflation rate of 2 percent
D) a paper that argued that the Phillips curve was stable and that it would not shift

Question 40

How does an increase in the aggregate demand translate in the Phillips curve model?

A) as an upward movement along the short-run Phillips curve
B) as a shift to the right of the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as a shift to the left of the short-run Phillips curve

Question 41

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, in the short run, where does an unexpected decrease in money supply growth move the economy to?

A) a and 1
B) b and 2
C) e and 5
D) d and 4

Question 42

What did Friedman and Phelps argue about inflation and unemployment?

A) that in the long run, monetary growth did not influence those factors that determine the unemployment rate
B) that the Phillips curve could be exploited in the long run by using monetary, but not fiscal policy
C) that the short-run Phillips curve was very steep but the long-run curve was very flat
D) that there was neither a short-run nor long-run tradeoff between inflation and unemployment

Question 43

In the long run, what will shift the long-run Phillips curve to the right?

A) an increase in the minimum wage
B) an increase in the money supply
C) a decrease in government spending
D) tax cuts

Question 44

Which statement characterizes the long-run Phillips curve?

A) Its position is determined primarily by monetary factors.
B) If it shifts right, long-run aggregate supply shifts right.
C) It cannot be changed by any government policy.
D) Its position depends on the natural rate of unemployment.

Question 45

Figure 16-2

Refer to the Figure 16-2. Suppose the economy is initially at point c. If the money supply increases, where does the economy move to in the short-run?

A) b
B) D
C) E
D) a

Question 46

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, in the short run, where does an unexpected increase in money supply move the economy to?

A) a and 1
B) b and 2
C) e and 5
D) d and 4

Question 47

Figure 16-2

Refer to the Figure 16-2. If the economy starts at c and the money supply growth rate increases, where does the economy move to in the long run?

A) b
B) d
C) e
D) a

Question 48

According to classical macroeconomic theory, what does money growth influence in the long run?

A) both real and nominal variables
B) the unemployment rate and output
C) only real variables
D) only nominal variables

Question 49

A vertical long-run Phillips curve is consistent with which of the following?

A) the principle of monetary neutrality
B) unemployment depends on money growth
C) a natural rate of unemployment that depends on the inflation rate
D) a downward-sloping aggregate-demand curve

Question 50

Figure 16-2

Refer to the Figure 16-2. What is Curve 2?

A) the long-run Phillips curve
B) the short-run Phillips curve
C) the long-run aggregate-demand curve
D) the short-run aggregate-demand curve

Question 51

In responding to the Phillips curve hypothesis, what did Friedman argue that a central bank can peg?

A) the unemployment rate
B) the price level
C) the growth rate of real GDP
D) the real exchange rate

Question 52

Which statement best describes how the natural rate of unemployment changes?

A) It cannot change; it is constant over time.
B) It does not change by any actions of the government.
C) It changes if the maximum legal number of work hours a week changes.
D) It changes if the rate at which the Bank of Canada increases the money supply changes.

Question 53

Figure 16-2

Refer to the Figure 16-2. What is Curve 1?

A) the long-run aggregate-supply curve
B) the short-run aggregate-supply curve
C) the long-run Phillips curve
D) the short-run Phillips curve

Question 54

Friedman argued that a central bank could use monetary policy to peg which of the following?

A) the nominal exchange rate
B) the real GDP growth rate
C) the unemployment rate
D) the interest rate

Question 55

Figure 16-2

Refer to the Figure 16-2. Where is the money supply growth rate the greatest?

A) at a
B) at b
C) at c
D) at e

Question 56

Figure 16-2

Refer to the Figure 16-2. Suppose the economy is initially at pointc. If the money supply growth rate decreases, where does the economy move to in the short-run?

A) b
B) d
C) e
D) a

Question 57

In the long run, what will happen if the Bank of Canada increases the rate at which it increases the money supply?

A) Inflation will be higher.
B) Unemployment will be lower.
C) Real GDP will be higher.
D) Unemployment will be higher.

Question 58

Milton Friedman argued that a central bank's control over the money supply could be used to peg which of the following?

A) the level or growth rate of a nominal variable, but not the level or growth rate of a real variable
B) the level of a nominal or real variable, but not the growth rate of a real or nominal variable
C) the level or growth rate of a real variable, but not the level or growth rate of a nominal variable
D) both levels and growth rates of both real and nominal variables

Question 59

According to Friedman and Phelps, no matter what a central bank does to the money supply, what will happen in the long run?

A) The economy will have a zero inflation rate.
B) The unemployment rate will tend toward the natural rate of unemployment.
C) The inflation rate will tend to the natural rate of inflation.
D) The economy will have a zero unemployment rate.

Question 60

In the long run, if the Bank of Canada decreases the rate at which it increases the money supply, what will happen to inflation and unemployment?

A) Inflation and unemployment will be higher.
B) Inflation will be higher and unemployment will be lower.
C) Inflation will be lower and unemployment will be higher.
D) Inflation will be lower and unemployment will stay the same.

Question 61

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, where does a decrease in aggregate demand move the economy to, in the short run and the long run?

A) a and 1 in the short run, b and 2 in the long run
B) b and 2 in the short run, a and 1 in the long run
C) d and 4 in the short run, e and 5 in the long run
D) b and 4 in the short run, e and 1 in the long run

Question 62

Figure 16-4

Refer to the Figure 16-4. Along SRPC3, what is the expected rate of inflation?

A) 0 percent
B) 2 percent
C) 3 percent
D) 5 percent

Question 63

How does the short-run Phillips curve model reflect an increase in the natural rate of unemployment?

A) as a leftward shift in the short-run Phillips curve
B) as a rightward shift in the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as an upward movement along the short-run Phillips curve

Question 64

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, in the long run, where does a decrease in money supply growth move the economy to?

A) a and 1
B) e and 5
C) d and 4
D) e and 5

Question 65

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, where does an increase in aggregate demand move the economy to, in the short run and the long run?

A) a and 1 in the short run, b and 2 in the long run
B) b and 2 in the short run, a and 1 in the long run
C) d and 4 in the short run, e and 5 in the long run
D) d and 2 in the short run, a and 5 in the long run

Question 66

How does the short-run Phillips curve reflect an increase in the price of oil such as occurred in the early 1970s?

A) as a leftward shift in the short-run Phillips curve
B) as a rightward shift in the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as an upward movement along the short-run Phillips curve

Question 67

Figure 16-3

Refer to the Figure 16-3. When would the economy move from c and 3 to b and 2?

A) in the short run if money supply growth increased unexpectedly
B) in the short run if money supply growth decreased unexpectedly
C) in the long run if money supply growth increased
D) in the long run if money supply growth decreased

Question 68

Figure 16-3

Refer to the Figure 16-3. When would the economy move from c and 3 to e and 5?

A) in the short run if money supply growth increased unexpectedly
B) in the short run if money supply growth decreased unexpectedly
C) in the long run if money supply growth increases
D) in the long run if money supply growth decreases

Question 69

What does the position of the long-run Phillips curve depend on?

A) the natural rate of unemployment
B) the actual rate of unemployment
C) the actual inflation rate
D) the expected inflation rate

Question 70

Suppose the long-run Phillips curve shifts to the left. For any given rate of money growth and inflation, how would unemployment and output change?

A) Unemployment would be higher, and output would be lower.
B) Unemployment would be higher, and output would be higher.
C) Unemployment would be lower, and output would be lower.
D) Unemployment would be lower, and output would be higher.

Question 71

What would shift the long-run Phillips curve to the right?

A) an increase in the money supply
B) an increase in the tax rate
C) increases in unemployment compensation
D) a decrease in the unemployment rate

Question 72

Figure 16-3

Refer to the Figure 16-3. Starting from c and 3, in the long run, where does an increase in money supply growth move the economy to?

A) a and 1
B) e and 4
C) d and 4
D) e and 5

Question 73

If efficiency wages became more common, where would the long-run Phillips curve and the long-run aggregate-supply curve shift?

A) Both the long-run Phillips curve and the long-run aggregate-supply curve would shift right.
B) Both the long-run Phillips curve and the long-run aggregate-supply curve would shift left.
C) The long-run Phillips curve would shift right, and the long-run aggregate-supply curve would shift left.
D) The long-run Phillips curve would shift left, and the long-run aggregate-supply curve would shift right.

Question 74

Suppose a policy increases the natural rate of unemployment. What is the effect of such a policy change?

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

Question 75

Figure 16-4

Refer to the Figure 16-4. Along SRPC2, what is the expected rate of inflation?

A) 0 percent
B) 1 percent
C) 2 percent
D) 3 percent

Question 76

Figure 16-4

Refer to the Figure 16-4. Along SRPC1, what is the expected rate of inflation?

A) 0 percent
B) 2 percent
C) 5 percent
D) 8 percent

Question 77

How does the short-run Phillips curve reflect a financial crisis such as the one in 2008-2009?

A) as a leftward shift in the short-run Phillips curve
B) as a rightward shift in the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as an upward movement along the short-run Phillips curve

Question 78

How does the short-run Phillips curve model reflect an increase in the expected inflation?

A) as a downward shift in the short-run Phillips curve
B) as an upward shift in the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as an upward movement along the short-run Phillips curve

Question 79

Suppose the long-run Phillips curve shifts to the right. For any given rate of money growth and inflation, how would unemployment and output change?

A) Unemployment would be higher, and output would be lower.
B) Unemployment would be higher, and output would be higher.
C) Unemployment would be lower, and output would be lower.
D) Unemployment would be lower, and output would be higher.

Question 80

Suppose the minimum wage decreased. At any given rate of inflation, what would happen to output and employment?

A) Both output and employment would be higher.
B) Both output and employment would be lower.
C) Output would be higher and unemployment would be lower.
D) Unemployment would be higher and output would be lower.