Deck 17: The Short-Run Tradeoff Between Inflation and Unemployment

Question 1

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

Answer 1

B

Question 2

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.

Answer 2

B

Question 3

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.

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 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 6

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

Question 7

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 8

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 9

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

Question 10

Which of the following statements is correct?

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

Question 11

Economist A.W. Phillips found a negative correlation between

A) output and unemployment.
B) unemployment and the interest rate.
C) output and the interest rate.
D) wage inflation and unemployment.

Question 12

Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short- run consequence of this contraction?

A) The inflation rate decreases.
B) The level of output decreases.
C) The unemployment rate increases.
D) All of the above are correct.

Question 13

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 14

When monetary and fiscal policymakers expand aggregate demand, which of the following costs is incurred in the short run?

A) Short-run aggregate supply decreases.
B) The natural rate of unemployment increases.
C) The price level increases more rapidly.
D) The money supply increases less rapidly.

Question 15

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 16

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 17

A.W. 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 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' 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 20

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 21

Unemployment would decrease and prices would increase if

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

Question 22

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 23

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 24

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

A) increases and unemployment increases.
B) increases and unemployment decreases.
C) decreases and unemployment increases.
D) decreases and unemployment decreases.

Question 25

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

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

Question 26

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 27

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 28

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 29

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 30

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 31

According to the Phillips curve, policymakers can reduce inflation by

A) contracting aggregate demand. This contraction results in a temporarily higher unemployment rate.
B) contracting aggregate demand. This contraction results in a temporarily lower unemployment rate.
C) expanding aggregate demand. This expansion results in a temporarily lower unemployment rate.
D) expanding aggregate demand. This expansion results in a temporarily higher unemployment rate.

Question 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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 40

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 41

Figure 35-1. 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 35-1. 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 42

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 43

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 44

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 according to the aggregate demand and aggregate supply model.
D) the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.

Question 45

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 46

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 according to the aggregate demand and supply model.
D) the aggregate demand and aggregate supply model, but not according to the short-run Phillips curve.

Question 47

Figure 35-1. 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 35-1. 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 48

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 49

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 50

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 51

Figure 35-1. 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 35-1. 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 52

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 53

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 according to the aggregate demand and aggregate supply model.
D) the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.

Question 54

Figure 35-1. 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 35-1. 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 55

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 56

Figure 35-1. 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 35-1. 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 57

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 58

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

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

Question 59

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 60

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 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 61

Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis.
Refer to Figure 35-4. What is measured along the horizontal axis of the left-hand graph?

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

Question 62

Figure 35-3. 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 35-3. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was

A) 144.
B) 150.
C) 152.
D) 156.

Question 63

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 64

Figure 35-1. 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 35-1. The curve that is depicted on the right­hand 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 65

Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis.
Refer to Figure 35-4. 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) 117.25.
B) 114.95.
C) 113.12.
D) 111.10.

Question 66

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 67

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 68

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 69

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 70

Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis.
Refer to Figure 35-4. What is measured along the horizontal axis of the right-hand graph?

A) the interest rate
B) the price level
C) the government's budget deficit as a percent of GDP
D) the unemployment rate

Question 71

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 72

Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis.
Refer to Figure 35-4. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was

A) 106.
B) 108.
C) 110.
D) 112.

Question 73

Figure 35-3. 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 35-3. 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 74

Figure 35-3. 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 35-3. 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 75

Figure 35-1. 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 35-1. 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 76

Figure 35-3. 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 35-3. 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

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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 78

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 79

Figure 35-2
Use the pair of diagrams below to answer the following questions.

Refer to Figure 35-2. 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.

Question 80

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.