Deck 15: The Short-Run Policy Tradeoff

Question 1

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 since money wages are flexible.
C) describe the same phenomena but contradict each other.
D) both exist because money wage rates are fixed in the short run.
E) both exist because real wage rates are fixed in the short run.

Answer 1

D

Question 2

Comparing the AS-AD model and the Phillips curve, we see that

A) they both are 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 is graphed as a relationship between the inflation rate and the rate of real GDP.
D) the AS-AD model uses the price level and the Phillips curve uses the rate of inflation.
E) the AS-AD model uses the price level and the Phillips curve uses real GDP.

Answer 2

D

Question 3

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

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

Answer 3

A

Question 4

Along a short-run Phillips curve, the

A) short-run cost of lower unemployment is higher inflation.
B) short-run benefit of lower unemployment is lower inflation.
C) short-run cost of lower inflation is higher interest rates.
D) long-run cost of lower inflation is higher unemployment.
E) short-run cost of higher inflation is a higher real interest rate.

Question 5

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

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

Question 6

The short-run Phillips curve shows the relationship between the

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

Question 7

During a recession, there is a ________ the short-run Phillips curve, while during an expansion there is a ________ the short-run Phillips curve.

A) movement closer to; movement further from
B) downward movement along; upward movement along
C) upward movement along; downward movement along
D) rightward shift of; leftward shift of
E) leftward shift of; rightward shift of

Question 8

The tradeoff exhibited by the short-run Phillips curve is

A) higher inflation with higher unemployment.
B) lower inflation with lower unemployment.
C) higher unemployment with lower inflation.
D) changing inflation with constant unemployment.
E) higher price level with lower real GDP.

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) the natural unemployment rate and the expected inflation rate
C) fiscal policy
D) interest rates
E) aggregate demand

Question 10

The natural unemployment rate and the expected inflation rate are constant when moving along the _______, which shows a trade off between ________ and ________.

A) short-run Phillips curve; inflation; unemployment
B) aggregate demand curve; inflation; employment
C) aggregate supply curve; inflation; unemployment
D) long-run Phillips curve; inflation; unemployment
E) short-run Phillips curve; inflation; employment

Question 11

If the economy is at full employment, then the unemployment rate

A) is greater than the natural unemployment rate.
B) is equal to the natural unemployment rate.
C) is below the natural unemployment rate.
D) can be anywhere on a short-run Phillips curve.
E) is equal to zero.

Question 12

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

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

Question 13

The curve shown in the figure above is the

A) aggregate demand curve.
B) aggregate supply curve.
C) demand for money curve.
D) Phillips curve.
E) potential GDP curve.

Question 14

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

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

Question 15

The short-run Phillips curve presents a tradeoff because a

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

Question 16

The short-run Phillips curve is ________ curve along which an increase in the unemployment rate is associated with ________ in the inflation rate.

A) a vertical; no change
B) a downward sloping; a decrease
C) an upward sloping; an increase
D) a horizontal; no change
E) a downward sloping; no change

Question 17

The short-run Phillips curve is

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

Question 18

The short-run Phillips curve illustrates ________ relationship between the unemployment rate and the inflation rate.

A) a positive
B) a negative
C) a mixed
D) no
E) an upside-down U-shaped

Question 19

The short-run Phillips curve shows the relationship between the

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

Question 20

The short-run Phillips curve shows

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

Question 21

In the short run, the level of real GDP changes with changes in the

A) amount of capital used because the labor force is fixed.
B) level of technology because the labor force and capital are fixed.
C) money wage rate because it is assumed to be fully flexible.
D) quantity of labor because capital and technology are fixed.
E) amount of employment and amount of capital because technology is fixed.

Question 22

_______ is fixed when moving along the aggregate supply curve.

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

Question 23

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

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

Question 24

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

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

Question 25

Okun's Law says that the difference between the unemployment rate and the natural unemployment rate determines

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

Question 26

If the natural unemployment rate is 5 percent, the actual unemployment rate is 8 percent, and potential GDP is $15 trillion, then according to Okun's Law, real GDP is

A) $14.25 trillion.
B) $14.1 trillion.
C) $13.8 trillion.
D) $13.05 trillion.
E) $15.9 trillion.

Question 27

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

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

Question 28

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

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

Question 29

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 upward-sloping aggregate supply curve.
B) the vertical potential GDP line.
C) the downward-sloping aggregate demand curve.
D) rightward shifts of the aggregate supply curve.
E) leftward shifts of the aggregate supply curve.

Question 30

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

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

Question 31

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 less than the expected inflation rate by 1 percentage point.
B) real GDP is below potential GDP by 2 percent.
C) real GDP is above potential GDP by 2 percent.
D) the inflation rate is greater than the expected inflation rate by 2 percentage points.
E) the real interest rate is below the natural real interest rate by 1 percentage point.

Question 32

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

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

Question 33

Moving ________ the short-run Phillips curve is equivalent to moving ________.

A) downward along; downward along the aggregate demand curve
B) downward along; upward along the aggregate demand curve
C) upward along; upward along the aggregate supply curve
D) downward along; upward along the potential GDP line
E) downward along; downward along the potential GDP line

Question 34

Okun's Law states that

A) supply creates its own demand.
B) as the real wage rate falls, the quantity of labor demanded increases.
C) as the unemployment rate rises, the inflation rate falls.
D) there is a relationship between the unemployment rate, real GDP, and potential GDP.
E) a higher inflation rate leads to a higher nominal interest rate.

Question 35

According to Okun's law, if the unemployment rate is 7 percent and the natural unemployment rate is 5 percent, potential GDP is ________ than real GDP.

A) 2 percent less
B) 4 percent less
C) 7 percent less
D) 2 percent greater
E) 4 percent greater

Question 36

Suppose the unemployment rate is 8 percent and the natural unemployment rate is 6 percent.If potential GDP is $8 trillion, using Okun's Law what does real GDP equal?

A) $7.68 trillion
B) $8.32 trillion
C) $7.84 trillion
D) $8.16 trillion
E) $8.00 trillion

Question 37

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) less than potential GDP.
B) greater than potential GDP.
C) equal to potential GDP.
D) increasing.
E) decreasing.

Question 38

Suppose the natural unemployment rate is 5 percent, the actual unemployment rate is 6 percent, and potential GDP is $5,000 billion.Based on Okun's law, real GDP is equal to ________ billion.

A) $5,000
B) $5,100
C) $4,900
D) $4,000
E) $5,900

Question 39

Moving upward along the aggregate supply curve, is equivalent to

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

Question 40

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

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

Question 41

Moving along the short-run Phillips curve, as the unemployment rate increases the inflation rate

A) decreases.
B) increases.
C) remains unchanged.
D) initially decreases and then increases.
E) initially increases and then decreases.

Question 42

Data from the United States and the United Kingdom show that the short-run Phillips curve exhibits

A) a great deal of shifting.
B) stability with shifts occurring only when external forces are strong.
C) stability with shifts occurring only when there is an internal change of government.
D) shifts that occur every five years or so.
E) positive slopes in both nations.

Question 43

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

A) 1.0 percent.
B) 10.0 percent.
C) 100 percent.
D) 110 percent.
E) None of the above answers is correct.

Question 44

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

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

Question 45

If real GDP exceeds potential GDP, then employment is ________ full employment and the unemployment rate is ________ the natural unemployment rate.

A) below; above
B) equal to; below
C) above; below
D) above; above
E) equal to; equal to

Question 46

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

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

Question 47

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 48

The short-run Phillips curve shows a relationship between the

A) inflation rate and the interest rate.
B) inflation rate and real GDP.
C) unemployment rate and the interest rate.
D) inflation rate and the unemployment rate.
E) price level and real GDP.

Question 49

A rightward shift of the aggregate demand curve leads to

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

Question 50

If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

A) 2.0 percent.
B) 0.02 percent.
C) 102 percent.
D) 100 percent.
E) unable to be determined without knowing potential GDP.

Question 51

An increase in aggregate demand results in

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

Question 52

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

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

Question 53

When an economy experiences a recession there is

A) a leftward shift of the short-run Phillips curve.
B) a rightward shift of the short-run Phillips curve.
C) an upward movement along 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

When the aggregate demand curve shifts rightward, the price level ________ and the unemployment rate ________.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) does not change; does not change

Question 55

If aggregate demand increases, thereby leading to an increase in real GDP and inflation, there is a

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

Question 56

When the aggregate demand curve shifts,

A) the short-run Phillips curve shifts.
B) there is a movement along the short-run Phillips curve.
C) there is a change in potential GDP.
D) there is a change in the natural unemployment rate.
E) the inflation rate does not change.

Question 57

When a movement up along the aggregate supply curve occurs, there is also

A) a movement down along the short-run Phillips curve.
B) a movement up along the short-run Phillips curve.
C) a rightward shift of the short-run Phillips curve.
D) a leftward shift of the short-run Phillips curve.
E) no movement along nor a shift in the short-run Phillips curve.

Question 58

In the short run, a decrease in aggregate demand will lead to

A) a decrease in the price level and an increase in real GDP.
B) an increase in the price level and a decrease in real GDP.
C) a decrease in the price level and an increase in the unemployment rate.
D) an increase in the price level and an increase in real GDP.
E) no change in the price level and a decrease in real GDP.

Question 59

The short-run Phillips curve is

A) vertical at the natural unemployment rate.
B) upward sloping.
C) downward sloping.
D) horizontal at the expected inflation rate.
E) U-shaped.

Question 60

If aggregate demand decreases, the

A) short-run Phillips curve shifts rightward.
B) short-run Phillips curve shifts leftward.
C) economy moves to a higher inflation rate along its short-run Phillips curve.
D) economy moves to a lower inflation rate along its short-run Phillips curve.
E) short-run Phillips curve does not shift nor is there a movement along it.

Question 61

The long-run Phillips curve shows the relationship between

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

Question 62

The long-run Phillips curve is a

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

Question 63

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

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

Question 64

The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is ________.

A) vertical
B) horizontal
C) upward sloping
D) downward sloping
E) unnecessary

Question 65

At full employment,

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

Question 66

The long-run Phillips curve is a vertical line because

A) the unemployment rate decreases when the inflation rate increases.
B) there is no relationship between the natural unemployment rate and the inflation rate.
C) the natural unemployment rate only depends on the inflation rate.
D) real GDP does not depend on the unemployment rate.
E) in the long run, the natural unemployment rate increases when inflation increases.

Question 67

In the long run, the unemployment rate

A) is zero.
B) is equal to the natural unemployment rate.
C) can take on any value.
D) is equal to the expected unemployment rate.
E) must be equal to the expected inflation rate.

Question 68

If the economy is at full employment, then the inflation rate

A) exceeds the expected inflation rate.
B) is less than the expected inflation rate.
C) can be anywhere on a short-run Phillips curve.
D) is equal to the expected inflation rate.
E) is equal to zero.

Question 69

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

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

Question 70

When aggregate demand increases, there is a movement ________ along the AS curve and ________.

A) up; a movement up along the short-run Phillips curve
B) up; a movement down along the short-run Phillips curve
C) up; an upward shift of the short-run Phillips curve
D) down; a downward shift of the short-run Phillips curve
E) down; a movement down along the short-run Phillips curve

Question 71

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 but the inflation rate can be any value.
D) equals the natural unemployment rate and the inflation rate equals the expected inflation rate.
E) decreases when the inflation rate increases.

Question 72

In the long run, the inflation rate

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

Question 73

According to Okun's Law, if the natural unemployment rate is 5 percent, the actual unemployment rate is 4 percent, and potential GDP is $10 trillion, then actual real GDP is

A) $12 trillion.
B) $11 trillion.
C) $9.6 trillion.
D) $10.4 trillion.
E) $10.2 trillion.

Question 74

The long-run Phillips curve is graphed as a

A) horizontal line at the expected level of inflation.
B) vertical line at the natural unemployment rate.
C) curve that slopes downward to the right.
D) curve that slopes upward to the right.
E) a straight line with a 45 degree slope.

Question 75

The long-run Phillips curve indicates that

A) any inflation rate is possible at the natural unemployment rate.
B) there is a tradeoff between the inflation rate and the unemployment rate in the long-run.
C) there is no way to control the inflation rate in the long run.
D) potential GDP can never be achieved.
E) any unemployment rate is possible at the natural inflation rate.

Question 76

The long-run Phillips curve is a ________ curve, and moving along the long-run Phillips curve an increase in the inflation rate is associated with ________ in the natural unemployment rate.

A) vertical; no change
B) downward sloping; a decrease
C) upward sloping; an increase
D) horizontal; no change
E) downward sloping; no change

Question 77

The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the economy is

A) at full employment.
B) in expansion.
C) in recession.
D) at full inflation.
E) away from potential GDP.

Question 78

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

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

Question 79

The long-run Phillips curve shows the relationship between

A) inflation and unemployment at full employment.
B) aggregate demand and aggregate supply at full employment.
C) aggregate demand and interest rates at full employment.
D) inflation and interest rates at full employment.
E) the price level and real GDP when the economy is not at full employment.

Question 80

The lack of a long-run tradeoff between the unemployment rate and the inflation rate means the long-run Phillips curve is

A) upward sloping.
B) horizontal.
C) vertical.
D) downward sloping.
E) U-shaped, with higher inflation initially decreasing unemployment and then increasing it back to the natural unemployment rate.