Deck 35: The Short Run Trade Off Between Inflation and Unemployment

Question 1

The misery index is supposed to measure the

A)social cost of unemployment.
B)health of the economy.
C)lost output associated with a particular unemployment rate.
D)short-run tradeoff between inflation and unemployment.

Answer 1

B

Question 2

Phillips found a

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

Answer 2

D

Question 3

If policymakers decrease aggregate demand,then in the long run

A)prices will be lower and unemployment will be higher.
B)prices will be lower and unemployment will be unchanged.
C)inflation and unemployment will be unchanged.
D)None of the above is correct.

Answer 3

B

Question 4

The misery index is calculated as the

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

Question 5

In the long run,

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 tradeoff between the inflation rate and the natural rate of unemployment.
D)All of the above are correct.

Question 6

Unemployment would decrease and prices increase if

A)aggregate demand shifted right.
B)aggregate demand shifted left.
C)aggregate supply shifted right.
D)aggregate supply shifted left.

Question 7

If the central bank increases the money supply,in the short run,prices

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

Question 8

If policymakers expand aggregate demand,then in the long run

A)prices will be higher and unemployment will be lower.
B)prices will be higher and unemployment will be unchanged.
C)prices and unemployment will be unchanged.
D)None of the above is correct.

Question 9

In the long run,policy that changes aggregate demand changes

A)both unemployment and the price level.
B)neither unemployment nor the price level.
C)only unemployment.
D)only the price level.

Question 10

There is a

A)short-run tradeoff between inflation and unemployment.
B)short-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
C)long-run tradeoff between inflation and unemployment.
D)long-run tradeoff between the actual unemployment rate and the natural rate of unemployment.

Question 11

In 2001,Congress and President Bush instituted tax cuts.According to the short-run Phillips curve this change should have

A)reduced inflation and unemployment.
B)raised inflation and unemployment.
C)reduce inflation and raised unemployment.
D)raised inflation and reduced unemployment.

Question 12

One determinant of the natural rate of unemployment is the

A)rate of growth of the money supply.
B)minimum wage rate.
C)expected inflation rate.
D)All of the above are correct.

Question 13

Closely watched indicators such as the inflation rate and unemployment are released each month by the

A)Bureau of the Budget.
B)Bureau of Labor Statistics.
C)Department of the Treasury.
D)President's Council of Economic Advisors.

Question 14

The short-run relationship between inflation and unemployment is often called

A)the Classical Dichotomy.
B)Money Neutrality.
C)the Phillips curve.
D)the Keynesian cross.

Question 15

In the long run,the inflation rate depends primarily on

A)the ability of unions to raise wages.
B)government spending.
C)the money supply growth rate.
D)the monopoly power of firms.

Question 16

If policymakers increase aggregate demand,the price level

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

Question 17

One determinant of the long-run average unemployment rate is the

A)market power of unions, while the inflation rate depends primarily upon government spending.
B)minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
C)rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions.
D)existence of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive.

Question 18

If policymakers decrease aggregate demand,the price level

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

Question 19

If the government raises government expenditures,in the short run,prices

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

Question 20

In the short run,policy that changes aggregate demand changes

A)both unemployment and the price level.
B)neither unemployment nor the price level.
C)only unemployment.
D)only the price level.

Question 21

Suppose that a central bank increases the money supply.According to the logic of the Phillips curve this should make

A)prices, output, and employment rise.
B)prices and output rise, employment fall.
C)prices rise and output and employment fall.
D)prices fall, output, and employment rise.

Question 22

Suppose that the money supply increases.In the short run this increases employment according to

A)both the short-run Phillips curve and the aggregate demand and aggregate supply model.
B)neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
C)the short-run Phillips curve, but not the aggregate demand and supply model.
D)the aggregate demand and aggregate supply model, but not the short-run Phillips curve.

Question 23

A.W.Phillips' findings were based on data

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

Question 24

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,an increase in government expenditures moves the economy to

A)b and 2.
B)b and 3.
C)d and 3.
D)None of the above is correct.

Question 25

Samuelson and Solow reasoned that when aggregate demand was low,unemployment was

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

Question 26

If the short-run Phillips curve were stable,which of the following 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 the money supply and a rise in unemployment.

Question 27

In 1968,economist Milton Friedman published a paper criticizing the Phillips curve on the grounds that

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

Question 28

The government of Libertina considers two policies.Policy A would shift AD right by 200 units while policy B would shift AD right by 100 units.According to the short-run Phillips curve policy A will lead

A)to a lower unemployment rate and a lower inflation rate than policy B.
B)to a lower unemployment rate and a higher inflation rate than policy B.
C)to a higher unemployment rate and lower inflation rate than policy B.
D)to a higher unemployment rate and higher inflation rate than policy B.

Question 29

Suppose that the money supply increases.In the short run,this increases prices according to

A)both the short-run Phillips curve and the aggregate demand and aggregate supply model.
B)neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
C)the short-run Phillips curve, but not the aggregate demand and aggregate supply model.
D)the aggregate demand and aggregate supply model but not the short-run Phillips curve.

Question 30

Phillips found a negative relation between

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

Question 31

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,a decrease in taxes moves the economy to

A)d and 2.
B)d and 3.
C)back to c and 1.
D)None of the above is correct.

Question 32

The economy will move to a point on the short-run Phillips curve where unemployment is lower if

A)the inflation rate decreases.
B)the government increases its expenditures.
C)the Fed decreases the money supply.
D)None of the above is correct.

Question 33

Samuelson and Solow believed that the Phillips curve

A)implied that low unemployment was associated with low inflation.
B)indicated that the aggregate supply and aggregate demand model was incorrect.
C)offered policymakers a menu of possible economic outcomes from which to choose.
D)All of the above are correct.

Question 34

Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve?

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

Question 35

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,an increase in taxes moves the economy to

A)b and 2.
B)d and 3.
C)e and 2.
D)None of the above is correct.

Question 36

Samuelson and Solow reasoned that when aggregate demand was high,unemployment was

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

Question 37

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,a decrease in the money supply moves the economy to

A)e and 1.
B)d and 2.
C)d and 3.
D)None of the above is correct.

Question 38

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,an increase in the money supply growth rate moves the economy to

A)a and 1.
B)b and 2.
C)c and 3.
D)None of the above is correct.

Question 39

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,a decrease in aggregate demand moves the economy to

A)a and 2.
B)d and 3.
C)e and 3.
D)None of the above is correct.

Question 40

Use the pair of diagrams below to answer the following questions.
Figure 35-1

Refer to Figure 35-1.If the economy starts at c and 1,then in the short run,a decrease in government expenditures moves the economy to

A)d and 2
B)d and 3.
C)e and 3.
D)None of the above is correct.

Question 41

The existence of sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied

A)in both the short and long run.
B)in the short run, but not the long run.
C)in the long run, but not the short run.
D)in neither the short nor the long run.

Question 42

The natural rate of unemployment

A)is constant over time.
B)varies over time, but can't be changed by the government.
C)is the socially desirable rate of unemployment.
D)does not depend on the rate at which the Fed increases the money supply.

Question 43

Which of the following is correct concerning 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 44

Suppose that money supply growth increases.In the long run,this increases employment according to

A)both the long-run Phillips curve and the aggregate demand and aggregate supply model
B)neither the long-run Phillips curve nor the aggregate demand and aggregate supply model
C)the long-run Phillips curve, but not the long-run aggregate supply curve
D)the long-run aggregate supply curve, but not the long-run Phillips curve

Question 45

Which of the following is downward sloping?

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

Question 46

In the long run,if the Fed 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)All of the above are correct.

Question 47

If efficiency wages became more common,

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 48

Friedman argued that the Fed could use monetary policy to peg a rate for

A)nominal exchange rates.
B)real GDP.
C)unemployment.
D)None of the above is correct.

Question 49

Which of the following is upward sloping?

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

Question 50

Which of the following is upward sloping?

A)both the long-run Phillips curve and the long-run aggregate supply curve
B)neither the long-run Phillips curve nor the long-run aggregate supply curve
C)the long-run Phillips curve, but not the long-run aggregate supply curve
D)the short-run Phillips curve, but not the long-run aggregate supply curve

Question 51

In the long run,if the Fed decreases the rate at which it increases the money supply,

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)None of the above is correct.

Question 52

Milton Friedman argued that the Fed's control over the money supply could be used to peg

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 53

In the short run

A)unemployment and inflation are positively related.In the long run they are largely unrelated problems.
B)and in the long run inflation and unemployment are positively related.
C)unemployment and inflation are negatively related.In the long run they are largely unrelated problems.
D)and in the long run inflation and unemployment are negatively related.

Question 54

In the long run,which of the following would shift the long-run Phillips curve to the right?

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

Question 55

The natural rate of unemployment

A)is constant over time.
B)varies over time, but can't be changed by the government.
C)is the unemployment rate that the economy tends to move to in the long run.
D)depends on the rate at which the Fed increases the money supply.

Question 56

Friedman and Phelps argued

A)that in the long run, monetary growth did not influence those factors that determine the economy's 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 not vertical.
D)that there was neither a short-run nor long-run tradeoff between inflation and unemployment.

Question 57

Which of the following leads to a higher level of unemployment in the long run?

A)both an increase in the size of the money supply and an increase in the money supply growth rate.
B)an increase in the size of the money supply but not an increase in the money supply growth rate.
C)an increase in the money supply growth rate, but not an increase in the size of the money supply.
D)neither an increase in the size of the money supply nor an increase in the money supply growth rate.

Question 58

In the late 1960s,economist Edmund Phelps published a paper that

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

Question 59

According to classical macroeconomic theory,in the long run

A)monetary growth affects both real and nominal variables.
B)the only real variable affected by monetary growth is the unemployment rate.
C)a number of factors that affect unemployment are influenced by monetary growth.
D)monetary growth affects nominal but not real variables.

Question 60

In responding to the Phillips curve hypothesis,Friedman argued that the Fed can peg the

A)unemployment rate.
B)inflation rate.
C)growth rate of real national income.
D)All of the above are correct.

Question 61

Which of the following would shift the long-run Phillips curve right?

A)expansionary fiscal policy.
B)an increase in the inflation rate.
C)increases in unemployment compensation.
D)None of the above is correct.

Question 62

Germany has a higher natural rate of unemployment than the United States.This suggests that

A)Germany is at a higher point on its long-run Phillips curve and so has higher inflation than the United States.
B)Germany is at a lower point on its long-run Phillips curve and so has lower inflation than the United States.
C)Germany's Phillips curve is to the left of that of the United States, possibly because they have higher inflation.
D)Germany's Phillips curve is to the right of that of the United States, possibly because they have more generous unemployment compensation.

Question 63

If the natural rate of unemployment falls,

A)both the short-run and long-run Phillips curves shift left.
B)the short-run Phillips curve shifts left, the long-run Phillips curve is unchanged.
C)the short-run Phillips curve is unchanged, the long-run Phillips curve shifts right.
D)the short-run and the long-run Phillips curves shift right.

Question 64

How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?

A)It would shift the long-run Phillips curve right.
B)It would shift the long-run Phillips curve left.
C)There would be an upward movement along a given long-run Phillips curve.
D)There would be a downward movement along a given long-run Philips curve.

Question 65

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.The money supply growth rate is greatest at

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

Question 66

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.If the economy starts at c and the money supply growth rate decreases,in the short run the economy

A)moves to b.
B)stays at c.
C)moves to e.
D)None of the above is correct.

Question 67

If the long-run Phillips curve shifts to the left,for any given rate of money growth and inflation the economy will have

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

Question 68

A movement to the right along a given short-run Phillips curve could be caused by

A)an increase in the natural rate of unemployment or expansionary monetary policy.
B)expansionary monetary policy, but not an increase in the natural rate of unemployment.
C)an increase in the natural rate of unemployment or a contractionary monetary policy.
D)contractionary monetary policy, but not an increase in the natural rate of unemployment.

Question 69

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.If the economy starts at c and the money supply growth rate increases,in the long run the economy

A)stays at c.
B)moves to b.
C)moves to e.
D)None of the above is correct.

Question 70

The position of the long-run Phillips curve and the long-run aggregate supply curve both depend on

A)the natural rate of unemployment and monetary growth.
B)the natural rate of unemployment, but not monetary growth.
C)monetary growth, but not the natural rate of unemployment.
D)neither monetary growth nor the natural rate of unemployment.

Question 71

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.Curve 1 is the

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

Question 72

A movement to the left along a given short-run Phillips curve could be caused by

A)a reduction in the natural rate of unemployment or expansionary monetary policy.
B)expansionary monetary policy, but not a reduction in the natural rate of unemployment.
C)either a reduction in the natural rate of unemployment or a contractionary monetary policy.
D)contractionary monetary policy, but not a reduction in the natural rate of unemployment.

Question 73

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.If the economy starts at c and the money supply growth rate increases,in the short run the economy

A)moves to b.
B)moves to d.
C)moves to e.
D)None of the above is correct.

Question 74

If the minimum wage increased,then at any given rate of inflation

A)both output and employment would be higher.
B)neither output nor employment would be higher.
C)output would be higher and unemployment would be lower.
D)output would be lower and unemployment would be higher.

Question 75

Suppose that the central bank reduces the growth rate of the money supply.In the short-run the effects of this are shown by

A)moving to the left along the short-run Phillips curve.
B)moving to the right along the short-run Phillips curve.
C)shifting the short run Phillips curve right.
D)shifting the short run Phillips curve left.

Question 76

Suppose the central bank pursues an expansionary monetary policy.In the short-run the effects of this are shown by

A)moving to the left along the short-run Phillips curve.
B)moving to the right along the short-run Phillips curve.
C)shifting the short run Phillips curve right.
D)shifting the short run Phillips curve left.

Question 77

For a number of years Canada and many European countries have had higher average unemployment rates than the United States.This suggests that these countries

A)have higher average inflation rates than the United States.
B)have long-run Phillips curves to the right of the United States'.
C)may have less generous unemployment compensation or lower minimum wages.
D)All of the above are consistent with the evidence on unemployment rates.

Question 78

If the long-run Phillips curve shifts to the right,for any given rate of money growth and inflation the economy will have

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

Question 79

A policy change that changes the natural rate of unemployment changes

A)neither the long-run Phillips curve nor the long-run aggregate supply curve.
B)both the long-run Phillips curve and the long-run aggregate supply curve.
C)the long-run Phillips curve, but not the long-run aggregate supply curve.
D)the long-run aggregate supply curve, but not the long-run Phillips curve.

Question 80

Use the graph below to answer the following questions.
Figure 35-2

Refer to Figure 35-2.Curve 2 is the

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