Deck 17: The Short-Run Trade-Off Between Inflation and Unemployment

Question 1

The misery index is calculated as the

A) inflation rate plus the unemployment rate.
B) unemployment rate minus the inflation rate.
C) actual inflation rate minus the expected inflation rate.
D) natural unemployment rate times the inflation rate

Answer 1

A

Question 2

Samuelson and Solow argued that when unemployment is high, there is

A) upward pressures on wages and prices.
B) upward pressures on wages and downward pressures on prices.
C) upward pressures on prices and downward pressures on wages.
D) downward pressures on wages and prices.

Answer 2

D

Question 3

The economist A.W. Phillips published a famous article in 1958 in which he showed a

A) negative correlation between the rate of unemployment and the rate of inflation.
B) positive correlation between the rate of unemployment and the rate of inflation.
C) negative correlation between the rate of unemployment and the rate of interest.
D) positive correlation between the rate of unemployment and the rate of interest

Answer 3

A

Question 4

In the long run, inflation

A) and unemployment are primarily determined by labor market factors.
B) and unemployment are primarily determined by the rate of money supply growth.
C) is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors.
D) is primarily determined by labor market factors while unemployment is primarily determined by the rate of money supply growth.

Question 5

In the long run,

A) the natural rate of unemployment depends primarily on the level of aggregate demand.
B) inflation depends primarily upon the money supply growth rate.
C) there is a tradeoff between the inflation rate and the natural rate of unemployment.
D) All of the above are correct.

Question 6

Phillips found a negative relation between

A) output and unemployment.
B) output and employment.
C) wage inflation and unemployment.
D) None of the above is correct.

Question 7

A. W. Phillips' findings were based on data

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

Question 8

In the long run, which of the following depends primarily on the growth rate of the money supply?

A) the natural rate of unemployment and the inflation rate
B) the natural rate of unemployment but not the inflation rate
C) the inflation rate but not the natural rate of unemployment
D) neither the natural rate of unemployment nor the inflation rate

Question 9

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

A) downward pressures on prices and wages.
B) downward pressures on prices and upward pressures on wages.
C) upward pressures on prices and downward pressures on wages.
D) upward pressures on prices and wages.

Question 10

One determinant of the natural rate of unemployment is the

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

Question 11

In his famous article published in an economics journal in 1958, A.W. Phillips

A) used data for the United States to show a negative relationship between the rate of change of the U.S. consumer price index and the U.S. unemployment rate.
B) used data for the United States to show a negative relationship between the rate of change of wages in the U.S. and the U.S. unemployment rate.
C) used data for the United Kingdom to show a negative relationship between the rate of change of the U.K. consumer price index and the U.K. unemployment rate.
D) used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

Question 12

In the long run,

A) the natural rate of unemployment depends primarily on the level of aggregate demand.
B) inflation depends primarily upon the money supply growth rate.
C) there is a tradeoff between the inflation rate and the natural rate of unemployment.
D) All of the above are correct.

Question 13

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

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

Question 14

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

A) the Classical Dichotomy.
B) Money Neutrality.
C) the Phillips curve.
D) None of the above is correct.

Question 15

The misery index is supposed to measure the

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

Question 16

In the short run,

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

Question 17

Which of the following depends primarily on the growth rate of the money supply?

A) inflation and the natural rate of unemployment
B) inflation but not the natural rate of unemployment
C) the natural rate of unemployment but not inflation
D) neither inflation nor the natural rate of unemployment

Question 18

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

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

Question 19

A.W. Phillips's discovery of a particular relationship between unemployment and inflation for the United Kingdom

A) could not be extended to other countries, despite many researchers' attempts to provide that extension.
B) was quickly extended to other countries by researchers.
C) was extended to only one other country - the United States.
D) was harshly criticized by the American economists Paul Samuelson and Robert Solow on the grounds that Phillips's study was fundamentally flawed.

Question 20

Phillips found a

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

Question 21

The short-run Phillips curve shows the combinations of

A) unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.
B) unemployment and inflation that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve.
C) real GDP and the price level that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve.
D) None of the above is correct.

Question 22

If the central bank decreases the money supply, then in the short run prices

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

Question 23

Samuelson and Solow argued that when unemployment is high,

A) aggregate demand is high, which puts upward pressure on wages and prices.
B) aggregate demand is high, which puts downward pressure on wages and prices.
C) aggregate demand is low, which puts upward pressure on wages and prices.
D) aggregate demand is low, which puts downward pressure on wages and prices.

Question 24

When aggregate demand shifts right along the short-run aggregate supply curve, unemployment

A) falls, so there are upward pressures on wages and prices.
B) falls, so there are downward pressures on wages and prices.
C) rises, so there are upward pressures on wages and prices.
D) rises, so there are downward pressures on wages and prices.

Question 25

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

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

Question 26

In the short run, policy that changes aggregate demand changes

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

Question 27

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

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

Question 28

Samuelson and Solow believed that the Phillips curve

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

Question 29

As aggregate demand shifts right along the aggregate supply curve,

A) inflation and unemployment are higher.
B) inflation is higher and unemployment is lower.
C) unemployment is higher and inflation is lower.
D) unemployment and inflation are lower.

Question 30

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

A) rises so unemployment rises.
B) rises so unemployment falls.
C) falls so unemployment rises.
D) falls so unemployment falls.

Question 31

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

A) decreased the money supply.
B) increased government expenditures.
C) decreased taxes.
D) None of the above is correct.

Question 32

There is a

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

Question 33

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

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

Question 34

If a central bank decreases the money supply, then

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

Question 35

Samuelson and Solow argued that a combination of low unemployment and low inflation

A) was impossible given the historical data as summarized by the Phillips curve.
B) could be achieved with an "appropriate" fiscal policy.
C) could be achieved with an "appropriate" monetary policy.
D) could be achieved with an "appropriate" mix of monetary and fiscal policies.

Question 36

If policymakers decrease aggregate demand, then in the short run the price level

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

Question 37

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

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

Question 38

According to the Phillips curve, policymakers could reduce both inflation and unemployment by

A) increasing the money supply.
B) increasing government expenditures.
C) raising taxes.
D) None of the above is correct.

Question 39

If policymakers increase aggregate demand, then in the short run the price level

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

Question 40

Unemployment would decrease and prices increase if

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

Question 41

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. The curve that is depicted on the right-hand graph offers policymakers a "menu" of combinations

A) that applies both in the short run and in the long run.
B) that is relevant to choices involving fiscal policy, but not to choices involving monetary policy.
C) of inflation and unemployment.
D) All of the above are correct.

Question 42

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

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

Question 43

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

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

Question 44

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. Assuming the price level in the previous year was 100, point F on the right-hand graph corresponds to

A) point A on the left-hand graph.
B) point B on the left-hand graph.
C) point C on the left-hand graph.
D) point D on the left-hand graph.

Question 45

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left-hand graph. Then it is apparent that the price index equaled

A) 130 in 2011.
B) 115 in 2011.
C) 110 in 2011.
D) 100 in 2011.

Question 46

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. Assuming the price level in the previous year was 100, point G on the right-hand graph corresponds to

A) point A on the left-hand graph.
B) point B on the left-hand graph.
C) point C on the left-hand graph.
D) point D on the left-hand graph.

Question 47

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

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

Question 48

If the short-run Phillips curve were stable, which of the following would be unusual?

A) an increase in government spending and a fall in unemployment
B) an increase in inflation and a decrease in output
C) a decrease in the inflation rate and a rise in the unemployment rate
D) a decrease in the money supply and a rise in the unemployment rate.

Question 49

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. What is measured along the vertical axis of the right-hand graph?

A) the interest rate
B) the inflation rate
C) the wage rate
D) the growth rate of the nominal money supply

Question 50

The government of Murkland considers two policies. Policy A would shift AD right by 300 units while policy B would shift AD right by 200 units. According to the short-run Phillips curve, policy A will lead

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

Question 51

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left-hand graph. Also suppose we know that the price index equaled 120 in 2011. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by

A) 155 and 175, respectively.
B) 138 and 156, respectively.
C) 137.5 and 154.75, respectively.
D) 135 and 150, respectively.

Question 52

If policymakers expand aggregate demand, then in the long run

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

Question 53

If policymakers decrease aggregate demand, then in the long run

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

Question 54

According to the short-run Phillips curve, if the central bank increases the money supply, then

A) inflation and unemployment will both fall.
B) inflation and unemployment will both rise.
C) inflation will fall and unemployment will rise.
D) inflation will rise and unemployment will fall.

Question 55

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

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

Question 56

Figure 17-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-1. What is measured along the horizontal axis of the left-hand graph?

A) the wage rate
B) the inflation rate
C) employment
D) output

Question 57

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

A) Louise reads in the newspaper that the central bank recently raised the money supply.
B) Eric gets fewer job offers
C) Jack makes larger increases in the prices at his health food store.
D) Maria's nominal wage increase is larger.

Question 58

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

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

Question 59

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, an increase in the money supply growth rate moves the economy to

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

Question 60

In the long run, policy that changes aggregate demand changes

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

Question 61

According to the short-run Phillips curve, inflation

A) and unemployment would fall if the policymakers decreased the money supply.
B) would fall and unemployment would rise if policymakers decreased the money supply.
C) and unemployment would fall if the policymakers increased the money supply.
D) would fall and unemployment would rise if policymakers increased the money supply.

Question 62

In 2007 and 2008 households and firms reduced desired expenditures. During the same period inflation fell and unemployment rose.

A) The change in inflation, but not the change in unemployment is consistent with what a given short-run Phillips curve implies.
B) The change in unemployment, but not the change in inflation is consistent with what a given short-run Phillips curve implies.
C) Both the change in inflation and the change in unemployment are consistent with what a given short-run Phillips curve implies.
D) Neither the change in inflation nor the change in unemployment are consistent with what a given short-run Phillips curve implies.

Question 63

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, a decrease in taxes moves the economy to

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

Question 64

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, a decrease in the money supply moves the economy to

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

Question 65

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

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

Question 66

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, a decrease in government expenditures moves the economy to

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

Question 67

During the financial crisis Congress and President Obama authorized tax cuts and increases in government spending. According to the Phillips curve, in the short run these policies should have

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

Question 68

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, an increase in government expenditures moves the economy to

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

Question 69

As the aggregate demand curve shifts leftward along a given aggregate supply curve,

A) unemployment and inflation are higher.
B) unemployment and inflation are lower.
C) unemployment is higher and inflation is lower.
D) unemployment is lower and inflation is higher.

Question 70

As the aggregate demand curve shifts rightward along a given aggregate supply curve,

A) unemployment and inflation are higher.
B) unemployment and inflation are lower.
C) unemployment is higher and inflation is lower.
D) unemployment is lower and inflation is higher.

Question 71

When aggregate demand shifts left along the short-run aggregate supply curve,

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

Question 72

Figure 17-3. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-3. What is measured along the vertical axis of the right-hand graph?

A) the interest rate
B) the inflation rate
C) the government's budget deficit as a percent of GDP
D) the growth rate of the nominal money supply

Question 73

In the late 1960s, Milton Friedman and Edmund Phelps argued that

A) the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run.
B) the trade-off between inflation and unemployment did not apply in the long run. This claim is inconsistent with monetary neutrality in the long run.
C) the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is consistent with monetary neutrality in the long run.
D) the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is inconsistent with monetary neutrality in the long run.

Question 74

In 2009 Congress and President Obama approved tax cuts and increased government spending. According to the short-run Phillips curve these policies should have

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

Question 75

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

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

Question 76

Figure 17-3. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-3. What is measured along the vertical axis of the left-hand graph?

A) the wage rate
B) the inflation rate
C) the price level
D) the change in output from one year to the next

Question 77

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

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

Question 78

Figure 17-3. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate.

Refer to Figure 17-3. Assume the figure charts possible outcomes for the year 2018. In 2018, the economy is at point B on the left-hand graph, which corresponds to point B on the right-hand graph. Also, point A on the left-hand graph corresponds to A on the right-hand graph. The price level in the year 2018 is

A) 155.56.
B) 159.00.
C) 163.50.
D) 170.04.

Question 79

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, a decrease in aggregate demand moves the economy to

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

Question 80

Figure 17-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 17-2. If the economy starts at C and 1, then in the short run, an increase in taxes moves the economy to

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