Deck 13: The Short-Run Policy Trade Off

Question 1

Moving along the short-run Phillips curve,if ________ increases,then ________ decreases.

A)inflation;unemployment
B)inflation;real GDP
C)inflation;the price level
D)unemployment;the expected inflation rate
E)unemployment;the price level

Answer 1

A

Question 2

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.

Answer 2

E

Question 3

The short-run Phillips curve shows

A)potential GDP.
B)the expected inflation rate.
C)a tradeoff between real GDP and unemployment.
D)a tradeoff between the unemployment rate and the inflation rate.
E)the natural unemployment rate.

Answer 3

D

Question 4

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 5

The short-run Phillips curve is another way of looking at

A)the natural rate of unemployment.
B)Okun's Law as applied to aggregate demand.
C)potential GDP.
D)aggregate demand.
E)aggregate supply.

Question 6

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.

Question 7

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 8

In the short run,if the economy is at full employment,then the quantity of real GDP

A)is equal to potential GDP,but the unemployment rate does not necessarily equal the natural unemployment rate.
B)exceeds potential GDP,and the unemployment rate is less than the natural unemployment rate.
C)does not necessarily equal potential GDP,but the unemployment rate is equal to the natural unemployment rate.
D)is equal to potential GDP,but the unemployment rate is less than the natural unemployment rate.
E)is equal to potential GDP,and the unemployment rate is equal to the natural unemployment rate.

Question 9

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

Question 10

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 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

The short-run Phillips curve presents a tradeoff because a

A)higher inflation rate leads to a higher nominal interest rate.
B)higher unemployment rate can be achieved at the cost of a higher inflation rate.
C)higher price level leads to lower real GDP.
D)lower unemployment rate can be achieved at the cost of a higher inflation rate.
E)lower unemployment rate can be achieved at the cost of a lower inflation rate.

Question 13

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 14

________ is fixed when moving along the aggregate supply curve.

A)The money wage rate
B)The price level
C)Employment
D)The real wage rate
E)Real GDP

Question 15

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 16

The short-run Phillips curve is

A)downward sloping.
B)vertical at a constant rate of unemployment.
C)upward sloping.
D)U-shaped.
E)horizontal at a constant rate of inflation.

Question 17

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 18

The short-run Phillips curve is a curve that shows the relationship,other things being constant,between ________ and ________.

A)the inflation rate;the nominal interest rate
B)the unemployment rate;real GDP
C)the inflation rate;the expected inflation rate
D)potential GDP;the natural unemployment rate
E)the inflation rate;the unemployment rate

Question 19

Moving along the short-run Phillips curve,a ________ unemployment rate can only be achieved by paying the cost of ________.

A)higher;a higher inflation rate
B)lower;a higher expected inflation rate
C)lower;a lower inflation rate
D)lower;a lower price level
E)lower;a higher inflation rate

Question 20

According to the AS-AD model,when real GDP exceeds potential GDP,the unemployment rate is definitely

A)greater than the natural unemployment rate.
B)less than the natural unemployment rate.
C)equal to the natural unemployment rate.
D)rising.
E)falling.

Question 21

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 7 per cent,real GDP is

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

Question 22

According to the AS-AD model,when real GDP is less than potential GDP,the unemployment rate is definitely

A)equal to the natural unemployment rate.
B)falling.
C)greater than the natural unemployment rate.
D)less than the natural unemployment rate.
E)rising.

Question 23

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 24

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 25

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 26

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 27

Moving upward along the aggregate supply curve is equivalent to

A)moving downward along the short-run Phillips curve.
B)shifting the short-run Phillips curve rightward.
C)shifting the short-run Phillips curve upward.
D)shifting the short-run Phillips curve leftward.
E)moving upward along the short-run Phillips curve.

Question 28

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.

Question 29

According to ________,when real GDP is ________ percentage points greater than potential GDP,the unemployment rate is one percentage point ________ the natural unemployment rate.

A)Okun's Law;four;below
B)Okun's Law;two;below
C)Phillips' Law;four;above
D)Say's Law;two;above
E)Keynes' Law;two;below

Question 30

A rightward shift of the aggregate demand curve leads to

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

Question 31

If the natural unemployment rate is 5 per cent and the actual unemployment rate is 3 per cent,then Okun's Law concludes that real GDP is

A)4 per cent less than potential GDP.
B)2 per cent greater than potential GDP.
C)2 per cent less than potential GDP.
D)4 per cent greater than potential GDP.
E)3 per cent greater than potential GDP.

Question 32

If the natural unemployment rate is 4 per cent and potential GDP is $30 billion then,according to Okun's Law,when the unemployment rate falls to 3 per cent,real GDP

A)decreases to $29.4 billion.
B)increases to $60 billion.
C)remains constant at $30 billion.
D)first decreases by 4 per cent and then increases by 4 per cent.
E)increases to $30.6 billion.

Question 33

If the price level rises from 100 to 110,then the inflation rate is

A)100 per cent.
B)10.0 per cent.
C)110 per cent.
D)1)0 per cent.
E)None of the above answers is correct.

Question 34

Suppose potential GDP is $100 billion and the natural unemployment rate is 5 per cent.If the unemployment rate is 6 per cent then,according to Okun's Law,real GDP is

A)$102 billion.
B)$101 billion.
C)$98 billion.
D)$100 billion.
E)$99 billion.

Question 35

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 36

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 37

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 38

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 39

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 40

Okun's Law states that for each percentage point that the unemployment rate is above its natural rate,there is a(n)________ per cent gap between real GDP and potential GDP.

A)6
B)random
C)8
D)4
E)2

Question 41

Changes in which of the following shift the short-run Phillips curve?
I)Changes in the natural unemployment rate
Ii)Changes in the expected inflation rate
Iii)Changes in the inflation rate

A)i only
B)ii only
C)iii only
D)i and ii
E)i,ii and iii

Question 42

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 43

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 44

The long-run Phillips curve is a

A)straight line with a 45° slope showing the long-run relationship between the inflation rate and the expected inflation rate.
B)horizontal line that shows the relationship between inflation and unemployment when the economy is at full employment.
C)vertical line indicating a positive relationship between inflation and unemployment.
D)horizontal line indicating a positive relationship between inflation and unemployment.
E)vertical line that shows the relationship between inflation and unemployment when the economy is at full employment.

Question 45

The relationship between the AS-AD model and the Phillips curve points out that as aggregate demand increases,the unemployment rate

A)increases and the inflation rate rises.
B)decreases and the price level falls.
C)decreases and the inflation rate rises.
D)decreases and the inflation rate does not change,only the price level rises.
E)increases and the inflation rate falls.

Question 46

At full employment,

A)the unemployment rate is zero.
B)the inflation rate is zero.
C)the unemployment rate is equal to the natural unemployment rate.
D)real GDP exceeds potential GDP.
E)the inflation rate must equal the natural unemployment rate.

Question 47

The long-run Phillips curve shows the relationship between ________ and ________ when the economy is at full employment.

A)the inflation rate;the unemployment rate
B)potential GDP;the natural unemployment rate
C)the natural inflation rate;the unemployment rate
D)the unemployment rate;real GDP
E)the inflation rate;the nominal interest rate

Question 48

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 49

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 50

If the economy moves upward along its short-run Phillips curve,in the AS-AD diagram,this movement is shown by a

A)rightward shift of potential GDP.
B)rightward shift of the AS curve and a movement along the AD curve.
C)movement upward along the AS curve as a result of a rightward shift of the AD curve.
D)movement downward along the AS curve as a result of a leftward shift of the AD curve.
E)leftward shift of the AS curve and a movement along the AD curve.

Question 51

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 52

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 53

When an economy experiences a recession,there is

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

Question 54

An increase in aggregate demand results in

A)a lower unemployment rate and a higher price level.
B)a decrease in real GDP and a decrease in the price level.
C)a lower unemployment rate and a lower price level.
D)a higher unemployment rate and a lower price level.
E)an increase in real GDP and a decrease in the price level.

Question 55

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 56

The long-run Phillips curve shows the relationship between

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

Question 57

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 58

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 59

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 60

The curve that shows the relationship between inflation and unemployment when the economy is at full employment is the

A)long-run Phillips curve.
B)short-run Phillips curve.
C)long-run Okun's curve.
D)aggregate supply curve.
E)aggregate demand curve.

Question 61

Hungry Jacks is paying $9 an hour to its workers.If the expected inflation rate equals the actual inflation rate and both are 10 per cent a year,then to keep the real wage rate constant in a year the money wage rate must

A)rise to $10.00 an hour.
B)stay at $9.00 an hour.
C)rise to $9.45 an hour.
D)rise to $9.90 an hour.
E)fall to $8.10 an hour.

Question 62

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 63

In the figure above,the expected inflation rate is

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

Question 64

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 65

In the long run,the inflation rate

A)is zero.
B)can take on any value.
C)cannot be negative.
D)is equal to the natural inflation rate.
E)must be equal to the natural unemployment rate.

Question 66

The short-run Phillips curve is downward sloping because

A)reducing the unemployment rate will reduce the inflation rate in the short run.
B)the expected inflation rate is zero in the short run.
C)in the long run,the expected inflation rate equals the actual inflation rate.
D)the economy always returns to full employment.
E)the unemployment rate can be above or below the natural unemployment rate.

Question 67

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 68

The lack of a long-run tradeoff between the unemployment rate and the inflation rate means that

A)the natural unemployment rate cannot change.
B)only fiscal policy is effective to lower the natural unemployment rate.
C)an increase in the inflation rate would not bring a reduction in the natural unemployment rate.
D)only a decrease in the inflation rate would bring a reduction in the natural unemployment rate.
E)only monetary policy is effective to lower the natural unemployment rate.

Question 69

In the figure above,the natural unemployment rate is

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

Question 70

In the long run,there is

A)no tradeoff between unemployment and inflation.
B)no tradeoff between fiscal policy and monetary policy.
C)a tradeoff between unemployment and natural unemployment.
D)a tradeoff between unemployment and inflation.
E)a tradeoff between unemployment and real GDP.

Question 71

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 72

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 73

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 74

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 75

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 76

The expected inflation rate is the inflation rate that people forecast and use to help set

A)the real wage rate.
B)the money wage rate.
C)the price level.
D)real GDP.
E)the natural rate of unemployment.

Question 77

Along the long-run Phillips curve,the unemployment rate ________,and the inflation rate ________.

A)is equal to the natural unemployment rate;is equal to the natural inflation rate
B)is equal to the natural unemployment rate;can be any value
C)can be any value;can be any value
D)can be any value;is equal to the natural inflation rate
E)None of the above answers is correct.

Question 78

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 79

The short-run Phillips curve is ________,and the long-run Phillips curve is ________.

A)downward sloping;vertical
B)upward sloping;vertical
C)downward sloping;downward sloping
D)vertical;upward sloping
E)vertical;downward sloping

Question 80

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.