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

Question 1

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.

Answer 1

D

Question 2

Which of the following 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 tradeoff between the inflation rate and the natural rate of unemployment.
D)The rate of economic growth depends primarily on the growth in money supply.

Answer 2

B

Question 3

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 3

A

Question 4

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

A)the Bureau of the Budget
B)the Ministry of Finance
C)the Department of the Treasury
D)Statistics Canada

Question 5

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

Question 6

In the long run, which of the following 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)the monopoly power of firms

Question 7

Is there a tradeoff between inflation and unemployment?

A)yes, in the short-run only
B)no, neither in the short run nor in the long run
C)yes, in the long run only
D)yes, both in the short run and in the long run

Question 8

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 9

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 10

Which of the following terms refers to the short-run relationship between inflation and unemployment?

A)the classical dichotomy
B)money neutrality
C)the Phillips curve
D)the Keynesian cross

Question 11

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

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

Question 12

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 13

In the long run, policy that changes aggregate demand also changes which of the following?

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

Question 14

According to Phillips, which of the following sets 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 15

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

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

Question 16

Which of the following is one determinant of the natural rate of unemployment?

A)the rate of growth of the money supply
B)the minimum wage rate
C)the expected inflation rate
D)the exchange rate

Question 17

If the short-run Phillips curve were stable, which of the following 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 18

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 output and an increase in unemployment

Question 19

Which of the following is the misery index supposed to measure?

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

Question 20

Which of the following 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 21

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 Phillips curve did not apply in the long run.
D)Phillips had made errors in collecting his data.

Question 22

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

A)e and 1
B)d and 2
C)d and 3
D)back to c and 1

Question 23

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

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

Question 24

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 offered policymakers a menu of possible economic outcomes from which to choose.
D)It demonstrated that fiscal policies were ineffective in reducing unemployment.

Question 25

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 26

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

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

Question 27

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

A)d and 2
B)d and 3
C)back to c and 1
D)c and 2

Question 28

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

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)only the short-run Phillips curve
D)only the aggregate demand and aggregate supply model

Question 29

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 30

Suppose that the money supply increases. In the short run, this increases employment according to what theory?

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)only the short-run Phillips curve
D)only the aggregate demand and aggregate supply model

Question 31

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 32

Which of the following 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 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 increases at a faster rate.

Question 33

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 34

In which of the following situations 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 35

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

A)lower inflation
B)lower taxes
C)a decrease the money supply
D)higher expectations about inflation

Question 36

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 37

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

A)The rate of inflation is related to unemployment in the long run.
B)Policymakers face a short-run Philips curve that is vertical.
C)The short-run unemployment rate is independent of the inflation rate.
D)Inflation and unemployment are unrelated in the long-run.

Question 38

Figure 16-1
Refer to Figure 16-1. 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 where?

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

Question 39

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

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

Question 40

Figure 16-1
Refer to 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 41

According to classical macroeconomic theory, which of the following does money growth influence in the long run?

A)both real and nominal variables
B)the unemployment rate
C)factors that affect unemployment
D)only nominal variables

Question 42

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 43

Which of the following 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 by changing the maximum legal number of work hours a week.
D)It changes by changing the rate at which the Bank of Canada increases the money supply.

Question 44

According to Friedman and Phelps, no matter what a central bank does to the money supply, which of the following 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 45

Figure 16-2
Refer to 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)either b or e

Question 46

Figure 16-3
Refer to 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)back to c and 3
D)d and 4

Question 47

Figure 16-2
Refer to 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 48

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)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
D)that there was neither a short-run nor long-run tradeoff between inflation and unemployment

Question 49

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

A)a and1
B)b and 2
C)back to c and 3
D)d and 4

Question 50

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

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

Question 51

In the long run, which of the following 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 52

In responding to the Phillips curve hypothesis, Friedman argued that a central bank can peg which of the following?

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

Question 53

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

A)b
B)d
C)e
D)either b or e

Question 54

Figure 16-2
Refer to 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 55

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 56

In the long run, which of the following 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 the money supply
D)tax cuts

Question 57

Which of the following 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 58

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

A)b
B)d
C)e
D)either b or e

Question 59

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

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

Question 60

Figure 16-2
Refer to 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 61

Figure 16-4
Refer to 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 62

Figure 16-3
Refer to 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)back to c and 3
C)d and 4
D)e and 5

Question 63

Figure 16-3
Refer to 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 64

Which of the following curves is (are) 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)only the long-run Phillips curve
D)only the short-run Phillips curve

Question 65

Figure 16-4
Refer to 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 66

Suppose that the money supply increases. In the long run, employment increases according to which of the following theories?

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)only the long-run Phillips curve
D)only the aggregate demand and aggregate supply model

Question 67

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

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 68

Suppose a policy affects the natural rate of unemployment. Which of the following does such a policy change?

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 69

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 70

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

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

Question 71

Figure 16-3
Refer to Figure 16-3. Where does a decrease in aggregate demand move the economy from c and 3 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 72

Figure 16-3
Refer to 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)back to c and 3
C)d and 4
D)e and 5

Question 73

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 74

Figure 16-4
Refer to 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 75

Which of the following curves is (are) downward sloping?

A)both the long-run and the short-run Phillips curve
B)neither the long-run nor the short-run Phillips curve
C)only the long-run Phillips curve
D)only the short-run Phillips curve

Question 76

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 77

Which of the following curves is (are) 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)only the long-run Phillips curve
D)only the long-run aggregate supply curve

Question 78

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)Neither output nor employment would be higher.
C)Output would be higher and unemployment would be lower.
D)Unemployment would be lower and output would be higher.

Question 79

Figure 16-3
Refer to Figure 16-3. Where does an increase in aggregate demand move the economy from c and 3 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 80

Figure 16-3
Refer to 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