Deck 29: Inflation and Disinflation

Question 1

If the NAIRU is 8% and the actual unemployment rate is 5%,

A)there is no pressure on the AS curve to shift.
B)there is a recessionary gap.
C)demand forces put upward pressure on wages.
D)the AS curve will shift downward.
E)it will get stuck there permanently.

Answer 1

demand forces put upward pressure on wages.

Question 2

Which of the following statements are correct? The expectational effect of inflation
1)is nullified as soon as the government promises zero inflation;
2)often plays a role in accelerating inflation;
3)is not directly a monetary cause of inflation.

A)1 only
B)2 only
C)3 only
D)1 and 2
E)2 and 3

Answer 2

2 and 3

Question 3

Suppose the NAIRU for Canada is 6.5%,and the actual unemployment rate is 5%.If the Bank of Canada reduces its target for the overnight interest rate,

A)it will move real GDP back toward potential GDP.
B)it will worsen the existing inflationary gap.
C)it will increase the unemployment rate.
D)the AD curve will shift to the left.
E)the AS curve will shift upward.

Answer 3

it will worsen the existing inflationary gap.

Question 4

Other things being equal,unit costs will rise and the AS curve will shift upward if

A)there is a fall in the price of oil.
B)the government reduces payroll taxes.
C)wage increases exceed productivity increases.
D)wages rise.
E)wage and price controls are in effect.

Question 5

If the unemployment rate is less than the NAIRU,

A)there is no pressure on the AS curve to shift.
B)there is a recessionary output gap.
C)demand forces will exert upward pressure on wages.
D)the AS curve will shift downward.
E)there will be downward pressure on wages.

Question 6

Suppose economists were able to measure frictional unemployment as 2%,cyclical unemployment as 0%,and structural unemployment as 3%.Then we would know that the NAIRU is ________ and the actual unemployment rate is ________.

A)0%; 5%
B)5%; 5%
C)0%; 3%
D)5%; 0%
E)2%; 5%

Question 7

Suppose economists were able to measure frictional unemployment as 3%,cyclical unemployment as 2%,and structural unemployment as 4%.Then we would know that the NAIRU is ________ and the actual unemployment rate is ________.

A)6%; 5%
B)5%; 9%
C)7%; 9%
D)7%; 7%
E)6%; 6%

Question 8

Suppose the Canadian economy is facing an inflationary output gap (Y > Y*).In our macro model,such an output gap can explain changes in which of the following variables?

A)the average level of wages
B)the level of wages in the forestry sector relative to the mining sector
C)the level of wages in a high-growth region of the country relative to a slow-growth region
D)the level of wages for skilled workers relative to unskilled workers
E)the level of wages for female workers relative to male workers

Question 9

Which of the following is consistent with constant inflation: expected future inflation of ________,output-gap inflation of ________,and supply-shock inflation ________.

A)2%; 2%; 2%
B)2%; 0%; -2%
C)2%; 0%; 0%
D)1%; 1%; 1%
E)0%; 0%; -2%

Question 10

The reason why inflation can persist even after its original causes have been removed is that

A)workers expect wage increases to match increases in labour productivity.
B)workers are willing to accept wage increases lower than the increase in productivity.
C)the Bank of Canada ensures that money-supply growth matches growth in real GDP.
D)inflationary expectations cause the AS curve to continue shifting upwards.
E)governments embark on a deficit-cutting program.

Question 11

Actual inflation would be 2% when expected future inflation is ________,output-gap inflation is ________,and supply-shock inflation is ________.

A)2%; 2%; 2%
B)2%; 0%; -2%
C)2%; 0%; 0%
D)1%; 1%; 1%
E)0%; 0%; -2%

Question 12

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

A)there is a recessionary gap.
B)the NAIRU will re-adjust to 5%.
C)the AD curve will automatically shift up.
D)the excess demand for labour will put upward pressure on wages.
E)the excess supply of labour will put downward pressure on wages.

Question 13

Suppose economists were able to measure frictional unemployment as 3%,cyclical unemployment as 2%,and structural unemployment as 4%.Then we would know that

A)Y is below Y* and there is downward pressure on wages.
B)Y is below Y* and there is upward pressure on wages.
C)Y is equal to Y* and there is no pressure on wages.
D)Y is above Y* and there is downward pressure on wages.
E)Y is above Y* and there is upward pressure on wages.

Question 14

The term NAIRU stands for the

A)non-accelerating inflation rate of unemployment.
B)natural and indexed rate of unemployment.
C)non-accelerating,indexed and regulated unemployment.
D)North American indexed rate of unemployment.
E)North American inflation rate of unemployment.

Question 15

Inflationary pressures that result from a rightward shift in the AD curve

A)cause Y to fall below Y^*.
B)will worsen any existing unemployment problem.
C)will initiate a wage-price spiral.
D)will eventually subside unless accompanied by continual increases in the money supply.
E)will permanently increase output.

Question 16

Suppose the NAIRU for Canada is 6%,the actual unemployment rate is 7%,and productivity is constant.We can conclude that

A)there is an inflationary gap.
B)the NAIRU will readjust to 7%.
C)the AD curve will automatically shift up.
D)the excess demand for labour will put upward pressure on wages.
E)the excess supply of labour will put downward pressure on wages.

Question 17

Increases in nominal wages in the economy are generally the effect of which force(s)?

A)output-gap effect
B)expectational effect
C)supply-shock inflation
D)output gap effect plus expectational effect
E)output gap effect plus expectational effect minus supply-shock inflation

Question 18

Which of the following would be expected to cause a an increase in the inflation rate rather than a once-and-for-all increase in the price level?

A)the imposition of a new sales tax
B)the sudden doubling of a key raw materials price
C)a new payroll tax that raises unit wage costs
D)expectations of higher future inflation
E)an early frost that damages the agricultural harvest

Question 19

Which of the following will lead to sustained inflation?

A)the imposition of a new sales tax
B)the sudden doubling of a key raw materials price
C)a new payroll tax that raises firms' unit labour costs
D)persistent expectations of continued inflation
E)an early frost that damages the agricultural harvest

Question 20

If the unemployment rate is greater than the NAIRU,

A)there will be upward pressure on wages.
B)the AS curve will shift upward.
C)there is a negative output gap.
D)real national income is above potential GDP.
E)there is an inflationary gap.

Question 21

Consider an economy without any supply shocks.If the expected inflation rate is 3% and the actual inflation rate is also 3%,then it is probably true that

A)real GDP equals potential GDP.
B)real GDP is less than potential GDP.
C)real GDP is more than potential GDP.
D)we can deduce nothing about the level of GDP.
E)the economy cannot be in a short-run equilibrium.

Question 22

Consider the AD/AS model with a constant rate of inflation.In this case,

A)there is no effective set of monetary policy tools to reduce inflation.
B)there is a tendency for the price of bonds to be increasing rapidly.
C)the AS curve is shifting upward because of inflation expectations.
D)expected inflation tends to be significantly less than actual inflation.
E)the AD curve is not shifting at all.

Question 23

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%.In order to prevent a drop in your real salary over the year,your employer would have to agree to change your nominal salary by

A)- 12%.
B)- 6%.
C)0.
D)+ 6%.
E)+ 12%.

Question 24

Consider the AD/AS model below with a constant rate of inflation.No exogenous AD or AS shocks are occurring. FIGURE 29-1
Refer to Figure 29-1.Assume there are no demand or supply shocks present in this analysis.What explains the movement of the AS curve from to to and so on?

A)unit costs are rising due to excess demand for labour
B)expectations of inflation are causing wage costs to rise continually
C)unit costs are rising because real wages are rising faster than nominal wages
D)expectations of inflation are causing a perpetual inflationary output gap
E)the AS curve shifts up as potential GDP (Y*)is continuously rising

Question 25

A constant inflation rate can be illustrated by the AD curve shifting upward

A)with no shifts in aggregate supply.
B)at the same rate as aggregate supply shifts upward.
C)at the same rate as aggregate supply shifts downward.
D)faster than aggregate supply shifts upward.
E)faster than aggregate supply shifts downward.

Question 26

Consider the AD/AS model below with a constant rate of inflation.No exogenous AD or AS shocks are occurring. FIGURE 29-1
Refer to Figure 29-1.What explains the movement of the AD curve from to to and so on?

A)increasing nominal wages cause desired consumption to increase,shifting the AD curve to the right
B)desired investment is increasing,shifting the AD curve to the right
C)the central bank is attempting to reduce inflation by removing monetary validation
D)the process of disinflation
E)the central bank is increasing the money supply and validating the inflationary expectations

Question 27

A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will

A)increase the price level but have an uncertain effect on GDP.
B)reduce the price level but have an uncertain effect on GDP.
C)increase GDP but have an uncertain effect on the price level.
D)reduce GDP but have an uncertain effect on the price level.
E)increase both GDP and the price level.

Question 28

A major reason why it is so difficult to eliminate a constant inflation is that inflationary expectations

A)make it impossible to stop the rightward shift of the AD curve.
B)make it impossible to reduce aggregate expenditure.
C)keep shifting the AS curve upward.
D)keep shifting the AS curve downward.
E)cannot be influenced by monetary policy.

Question 29

Canada's actual rate of inflation is fairly constant around the 2% level.We can conclude that

A)real GDP must be below potential GDP because we also have positive unemployment.
B)real GDP must be above potential GDP.
C)the Bank of Canada is accommodating this level of inflation with increases in the money supply.
D)the expectations about inflation are consistently wrong.
E)the economy is consistently experiencing an inflationary gap.

Question 30

When a central bank attempts to stop a constant inflation,it tries to remove the inflationary gap by

A)shifting the AS curve upward.
B)shifting the AS curve downward.
C)increasing the rightward shift of the AD curve.
D)stopping the rightward shift of the AD curve.
E)taking no action and allowing the market to correct itself.

Question 31

A constant inflation in the AD/AS macro model is only possible when

A)AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate.
B)AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate.
C)AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate.
D)AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate.
E)None of the above - constant inflation is not possible.

Question 32

Consider the AD/AS model below with a constant rate of inflation.No exogenous AD or AS shocks are occurring. FIGURE 29-1
Refer to Figure 29-1.Suppose the constant rate of inflation is 3%.In this case,

A)equilibrium GDP and the price level are each increasing at a constant rate of 3% per year.
B)the AS curve is shifting upward by 3% per year and the AD curve remains stationary.
C)the AD curve is shifting upward by 3% per year and the AS curve remains stationary.
D)an annual shift upward of each of the AS and AD curves by 1.5% leads to a constant rate of inflation of 3%.
E)an annual shift upward of the AS curve by 3% is matched by an annual shift upward of the AD curve by 3%.

Question 33

Suppose the actual rate of inflation in the economy is 5%.If we know that expected inflation is 2%,and that output-gap inflation is 1%,then we also know that

A)the NAIRU is 5%.
B)money wages must be rising by 5%.
C)non-wage supply-shock inflation must equal 2%.
D)expected inflation is rising by 2%.
E)the actual rate of inflation is falling.

Question 34

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

A)+12%.
B)+ 6%.
C)0%.
D)- 6%.
E)- 12%.

Question 35

Consider the AD/AS model below with a constant rate of inflation.No exogenous AD or AS shocks are occurring. FIGURE 29-1
Refer to Figure 29-1.A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one as

A)an annual shift upward of the AD curve by 3%.
B)an annual shift upward of the AS curve by 3%.
C)an annual increase in the inflation rate of 3%.
D)an annual increase in the equilibrium price level of 3%.
E)Not applicable.The diagram shows the price level,not the inflation rate.

Question 36

Consider the AD/AS model below with a constant rate of inflation.No exogenous AD or AS shocks are occurring. FIGURE 29-1
Refer to Figure 29-1.Which of the following statements about this AD/AS diagram is true?

A)expected inflation exceeds actual inflation
B)actual inflation exceeds expected inflation
C)actual inflation equals expected inflation
D)actual inflation equals output gap inflation
E)expected inflation equals output gap inflation

Question 37

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

A)Because the money transmission mechanism does not apply in a situation of sustained inflation.
B)Because the rising price level is decreasing the demand for money which is pushing interest rates up.
C)Because the declining interest rates cause the investment demand curve to shift to the right,which causes interest rates to rise.
D)Because the rising price level is increasing the demand for money which tends to push interest rates up.
E)Because the declining interest rates cause the investment demand curve to shift to the left,which causes interest rates to rise.

Question 38

A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in

A)an increase the price level and an uncertain effect on unemployment.
B)a reduction in the price level and an uncertain effect on unemployment.
C)an increase in unemployment and an uncertain effect on the price level.
D)a reduction in unemployment and an uncertain effect on the price level.
E)a reduction in both unemployment and the price level.

Question 39

Assuming that the economy is currently in a long-run equilibrium at Y^*,a subsequent negative aggregate demand shock with no change in the money supply will eventually result in

A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and GDP below potential output.
D)a higher price level and GDP at potential GDP.
E)a lower price level and GDP at its potential level.

Question 40

In the basic AD/AS macro model,actual inflation is the sum of three separate components.They are

A)accelerated inflation,expected inflation and output gap inflation.
B)validated inflation,expected inflation,and output gap inflation.
C)output gap inflation,wage-push inflation and demand inflation.
D)output gap inflation,expected inflation and supply-shock inflation.
E)accelerated inflation,demand inflation and supply inflation.

Question 41

FIGURE 29-2
Refer to Figure 29-2.Suppose the economy has moved from E₀ to E₁.If there is then no monetary validation,the adjustment process will lead to a new equilibrium at

A)E₀.
B)E₁.
C)E₂.
D)E₃.
E)E₄.

Question 42

Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant.This scenario will eventually lead to

A)an increase in wages and an upward shift of the AS curve.
B)a reduction in wages and a downward shift of the AS curve.
C)a permanent decrease in output.
D)the emergence of an inflationary gap.
E)increased transactions demand for money,and a higher rate of interest.

Question 43

Suppose the economy is operating at full employment.A permanent rightward shift in the AD curve will cause inflationary pressures that will

A)cause Y to fall below Y*.
B)worsen any existing unemployment problem.
C)initiate a wage-price spiral.
D)eventually subside unless accompanied by expansionary monetary policy.
E)permanently increase output.

Question 44

FIGURE 29-2
Refer to Figure 29-2.The movement of the economy from E₁ to E₂ was likely caused by

A)an increase in the price level.
B)a positive supply shock induced by new technology.
C)a negative demand shock due to government cut-backs.
D)a negative supply shock due to a rise in input prices.
E)the monetary validation of an initial demand shock by the central bank,combined with ongoing inflation expectations.

Question 45

FIGURE 29-2
Refer to Figure 29-2.Suppose an inflationary gap has opened and the economy is at E₁.Which of the following statements best describes the movement of the economy from E₁ to E₂?

A)The inflationary gap puts upward pressure on factor prices and AS shifts upward.Simultaneously,the Bank of Canada validates the demand shock,thus shifting the AD curve further to the right.
B)The inflationary gap puts upward pressure on factor prices and AS shifts upward.Simultaneously,the Bank of Canada implements a contractionary monetary policy,shifting the AD curve to the left.
C)The inflationary gap causes an increase in the expectations of the future inflation.As a result,the AS curve shifts upward and the AD curve shifts to the right.
D)The inflationary gap generates excess demand for labour,which causes the AD curve to shift to the right.The adjustment process then shifts the AS curve upward.
E)The economy's adjustment process causes the economy to move from E₁ to E₂.

Question 46

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will

A)increase GDP but have an uncertain effect on the price level.
B)reduce GDP but have an uncertain effect on the price level.
C)increase the price level but have an uncertain effect on GDP.
D)reduce the price level but have an uncertain effect on GDP.
E)reduce both the price level and GDP.

Question 47

If the central bank responds to repeated negative supply shocks with monetary validations,the economy will be faced with

A)a one-time increase in prices.
B)a one-time decrease in prices.
C)alternating periods of inflation and deflation.
D)steady reductions in real output.
E)continuous inflation.

Question 48

For the economy of Canada,a major oil user and exporter,a decrease in the world price of oil would be considered

A)a negative demand and a negative supply shock.
B)both a negative demand shock and a positive supply shock.
C)both a positive demand shock and a negative supply shock.
D)a negative demand shock only.
E)a negative supply shock only.

Question 49

Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy.This scenario will lead to

A)an increase in wages and an upward shift of the AS curve.
B)a wage-price spiral.
C)a permanent decrease in output.
D)the emergence of a recessionary gap.
E)reduced transactions demand for money,an increase in the price of bonds,and a lower rate of interest.

Question 50

FIGURE 29-2
Refer to Figure 29-2.The movement of the economy from E₀ to E₁ was likely caused by a

A)positive demand shock associated with increased investment.
B)negative demand shock due to government cut-backs.
C)negative supply shock due to a rise in input prices.
D)positive supply shock induced by developments of new technology.
E)positive supply shock caused by lower nominal wages.

Question 51

A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will

A)increase unemployment but have an uncertain effect on the price level.
B)reduce unemployment but have an uncertain effect on the price level.
C)increase the price level but have an uncertain effect on unemployment.
D)reduce the price level but have an uncertain effect on unemployment.
E)increase both the price level and unemployment.

Question 52

Assume that an economy is currently in long-run equilibrium at its potential output and that it is subjected to a positive demand shock.When the economy moves back to producing its potential level of national income,the price level will be

A)equal to what it was originally before the demand shock.
B)lower than it was in short-run equilibrium and the lower than it was originally.
C)lower than it was in the short-run equilibrium but higher than it was originally.
D)higher than it was in the short-run equilibrium but lower than it was originally.
E)higher than it was in the short-run equilibrium and even higher than it was originally.

Question 53

At the end of the 1970s,the inflation rate in Canada had exceeded 10%.This high inflation was due mainly to

A)external pressures on the Canadian dollar.
B)steadily decreasing factor prices.
C)steadily decreasing factor prices and a contractionary monetary policy.
D)a substantial negative supply shock that was partly validated by monetary policy.
E)the extremely high wage increases being won by strong labour unions.

Question 54

Beginning from a position of long-run equilibrium,an expansionary monetary policy by the Bank of Canada causes

A)aggregate demand for goods and services to exceed potential output.
B)aggregate demand for goods and services to fall short of potential output.
C)an increase in most market interest rates.
D)a fall in the general price level.
E)an increase in the level of potential output.

Question 55

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in

A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and real GDP below potential output.
D)a higher price level and GDP at potential output.
E)an ongoing deflation in the economy.

Question 56

The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward.The Bank of Canada validated this negative supply shock with an increase in the money supply,whereas in the United States such monetary validation did not take place.The predictable result was that

A)both countries experienced large increases in price levels and almost no recession.
B)Canada experienced a large increase in its price level but almost no recession,and the U.S.experienced a smaller increase in its price level but a significant recession.
C)Canada experienced a one-time price increase and the U.S.experienced persistent inflation.
D)the U.S.experienced a large increase in its price level but almost no recession,and Canada experienced a smaller increase in its price level but a severe recession.
E)both countries experienced small increases in price levels and severe recessions.

Question 57

For the economy of Ontario,which is a major oil user and importer,an increase in the world price of oil would be considered

A)monetary validation.
B)a negative demand shock.
C)demand inflation.
D)a negative supply shock.
E)an adjustment process.

Question 58

Beginning from a position of long-run equilibrium,a contractionary monetary policy by the Bank of Canada causes

A)aggregate demand for goods and services to exceed potential output.
B)potential output to exceed aggregate demand for goods and services.
C)a fall in most market interest rates.
D)an increase in the general price level.
E)an increase in potential output.

Question 59

For the economy of Alberta,a major oil exporter,an increase in the world price of oil would be mostly

A)supply inflation.
B)a negative demand shock.
C)a negative supply shock.
D)a positive demand shock.
E)a positive supply shock.

Question 60

Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y^*,a positive AD shock (with no change in the money supply)will eventually result in

A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and GDP below its potential level.
D)a higher price level and GDP at its potential level.
E)a lower price level and GDP at its potential level.

Question 61

"Supply inflation" refers to

A)inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production.
B)inflation arising from a shortage of labour.
C)the increase in the price level that occurs when the excess demand for inputs pushes up input costs.
D)the increase in the price level that occurs when there is excess supply of factors of production.
E)any increase in the price level that results from an upward shift of the AD curve.

Question 62

FIGURE 29-3
Refer to Figure 29-3.The movement of the economy from E₀ to E₁ was likely caused by

A)a positive demand shock due to an increase in investment.
B)a positive supply shock caused by improved productivity.
C)a negative demand shock caused by fall in consumption.
D)a negative supply shock caused by higher input prices.
E)an increase in the price level.

Question 63

Suppose that an increase in world oil prices leads to greater demand for Canadian oil exports.If the Bank of Canada reduces the overnight interest rate in response to this increase in AD,this is called

A)monetary validation.
B)a demand shock.
C)demand inflation.
D)a supply shock.
E)an adjustment process.

Question 64

Isolated negative aggregate supply shocks,in the absence of monetary validation,will

A)eventually be self-correcting as wages slowly fall.
B)never be self-correcting without government policy to expand the money supply.
C)be self-correcting only if the aggregate demand curve shifts.
D)result in a permanent output gap.
E)have no short-run or long-run effects.

Question 65

If the central bank responds to a single negative supply shock with monetary validation,we can expect an increase in

A)the money supply but a decrease in costs and prices.
B)costs but a decrease in real national income.
C)the size of the output gap.
D)costs,the price level,and the money supply.
E)the price level and unemployment.

Question 66

Suppose the AS curve is continuously shifting upward due to expectations of future inflation.If there is repeated monetary validation of this supply shock,

A)unemployment will continue to rise.
B)the supply shocks will reverse themselves.
C)workers will have higher real wages.
D)there will be ongoing inflation.
E)there will be a once-and-for-all rise in the price level.

Question 67

If the Bank of Canada validates a positive AD shock,

A)it will have eliminated the possibility of a continued inflation.
B)there is the risk of continued inflation.
C)wages will fall to reduce the resulting unemployment.
D)output will fall more rapidly than if the shock had not been validated.
E)the AD curve will shift to the left and inflation will stop.

Question 68

Economists use the term "monetary validation" to refer to

A)the money supply being increased in response to a demand shock.
B)the Bank of Canada having a credible policy of zero inflation.
C)the money supply being increased in response to a supply or a demand shock that raises the price level.
D)people who hold smaller money balances at higher rates of interest.
E)money supply increases which have been approved by Parliament.

Question 69

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

A)an inflationary gap will be created with further inflation.
B)an inflationary gap will be created,which will cause the AS curve to shift upward again.
C)the aggregate demand curve will shift up and result in a higher price level.
D)a recessionary gap will be created,which eventually causes the AS curve to shift downward.
E)a recessionary gap will be created and will cause a permanent reduction of employment.

Question 70

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

A)if there is no monetary validation.
B)in the long run.
C)in the short run.
D)independent of the economy's adjustment process.
E)if expected inflation is positive but constant.

Question 71

Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil.If the central bank does not respond to this shock,

A)prices will rise and stay at the higher level with no further inflation.
B)a recessionary gap will be created,which will eventually cause the AS curve to shift back downward.
C)aggregate demand will shift up and cause further inflation.
D)an inflationary gap will be created,which will cause the AS curve to shift upward again.
E)a recessionary gap will be created and will cause a permanent reduction in employment.

Question 72

FIGURE 29-3
Refer to Figure 29-3.Suppose the economy is at E₁ and that there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at ,the economy will tend towards a new long-run equilibrium characterized by a(n)

A)lower price level and GDP below the potential level.
B)higher price level and GDP below the potential level.
C)unchanged price level and GDP at the potential level.
D)lower price level and GDP at the potential level.
E)higher price level and GDP above the potential level.

Question 73

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

A)an inflationary gap.
B)a one-time rise in the price level.
C)rising unemployment until the wage increases cease,or are offset by other wage decreases.
D)a shrinking output gap.
E)peace in labour-management relations.

Question 74

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

A)to reduce unemployment below the NAIRU.
B)that the Bank of Canada must be seen to be pursuing a restrictive monetary policy,in order to stop any expectational inflation.
C)that wages often fall only very slowly,so the adjustment back to full employment can take a very long time.
D)that there is the danger of initiating a wage-price spiral.
E)to keep a "healthy" amount of inflation in the economy.

Question 75

A central bank might decide to "validate" a negative supply shock because

A)there is no other way to return the economy to full employment.
B)the economy might suffer a long slump before wages and prices fall enough to restore full employment.
C)central banks tend to pay little heed to inflation.
D)it is an effective means of preventing inflation.
E)there are no negative effects from this policy action.

Question 76

Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply.The short-term effect on the Canadian price level would be called

A)monetary validation.
B)a monetary transmission.
C)demand inflation.
D)a supply shock.
E)an adjustment process.

Question 77

Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy,it would

A)cause a temporary drop in inflation.
B)decrease the actual inflation rate.
C)cause a permanent recessionary gap.
D)be acting to de-stabilize the economy.
E)decrease employment.

Question 78

"Demand inflation" refers to

A)the inflation that results from a decrease in net exports.
B)any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation.
C)any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation.
D)only the inflation that results from an expansionary monetary policy.
E)the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.

Question 79

The act of "monetary validation" by a central bank can

A)cause a supply shock.
B)perpetuate inflation.
C)act to reduce inflation.
D)increase unemployment.
E)no longer be carried out by the Bank of Canada.

Question 80

FIGURE 29-3
Refer to Figure 29-3.The movement of the economy from E₁ to E₂ was likely caused by

A)a negative demand shock associated with a reduction in net exports.
B)a positive supply shock caused by improved productivity.
C)a monetary expansion by the Bank of Canada.
D)an increase in the price level.
E)a negative demand shock combined with a positive supply shock.