Question 1

What is the long-run effect of a decrease in expected inflation predicted by the Phillips curve model?

Accepted Answer

A)  lower inflation, but no change in unemployment 
B)  lower inflation and lower output 
C)  higher inflation and higher unemployment 
D)  no change in inflation, but higher unemployment

Question 2

This exercise uses an aggregate-supply curve and a production function to construct the corresponding Phillips curve. Its purpose is to better understand the assumptions behind the short-run Phillips curve. Suppose the aggregate production function of an economy is Y=L, where Y is output and L is labour (employment). Unemployment is U=LF-L, and the unemployment rate is u = U/LF. We also need to assume that the labour force (LF) is constant, such that an increase in the number of employed people (ÄL) corresponds to an equal decrease in the number of unemployed (-ÄU). Let us assume a very simple-short run aggregate supply curve, Y=P. Question: For the price levels P equal 100, 105, and 115, find two inflation-unemployment points in a Phillips curve diagram. Consider LF=120.

Accepted Answer

The answer of This exercise uses an aggregate-supply curve and...

Question 3

What happened to expected inflation in Canada during the 1970s?

Accepted Answer

A)  It increased substantially. 
B)  It increased slightly. 
C)  It decreased slightly. 
D)  It decreased substantially.

Question 4

Which statement best characterizes the theory of rational expectations?

Accepted Answer

A)  It suggests that estimates of the sacrifice ratio should be used to guide policy. 
B)  It concerns how people use information to predict the future. 
C)  It explains why the long-run Phillips curve is vertical. 
D)  It explains how people act when there is unemployment and workers must be rationed.

Question 5

If the government decreases government expenditures, what happens to prices and unemployment in the short run?

Accepted Answer

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

Question 6

How does a decrease in the expected rate of inflation shift the Phillips curves?

Accepted Answer

A)  It shifts both the short-run and long-run Phillips curves to the right. 
B)  It shifts the long-run Phillips curve left and the short-run Phillips curve right. 
C)  It shifts only the short-run Phillips curve to the right. 
D)  It shifts only the short-run Phillips curve to the left.

Question 7

Faced with an adverse supply shock, what can policymakers increase, and how will prices and output be affected?

Accepted Answer

A)  They can increase aggregate demand, which increases prices and output. 
B)  They can increase aggregate demand, which decreases prices and increases output. 
C)  They can increase aggregate supply, which increases prices and output. 
D)  They can increase aggregate supply, which decreases prices and increases output.

Question 8

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

Accepted Answer

A)  the price level 
B)  the unemployment rate 
C)  the aggregate supply 
D)  the natural rate of unemployment

Question 9

In the long run, how does an increase in the rate of growth of the money supply shift the Phillips curves?

Accepted Answer

A)  It shifts both the short-run and long-run Phillips curves to the right. 
B)  It shifts the long-run Phillips curve right and the short-run Phillips curve left. 
C)  It shifts only the short-run Phillips curve to the right. 
D)  It shifts only the short-run Phillips curve to the left.

Question 10

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

Accepted Answer

The answer of Explain the connection between the vertical long-run...

Question 11

Explain the causes and consequences of the early 1970s recession in Canada. How did the authorities respond, and what were the long-term effects of this response? What do we learn from this case study?

Accepted Answer

The answer of Explain the causes and consequences of the...

Question 12

If the sacrifice ratio is 3, reducing the inflation rate from 10 percent to 6 percent would require sacrificing what percent of annual output?

Accepted Answer

A)  1 1/4 percent of annual output 
B)  4 percent of annual output 
C)  7 percent of annual output 
D)  12 percent of annual output

Question 13

How does an increase in the aggregate demand translate in the Phillips curve model?

Accepted Answer

A)  as an upward movement along the short-run Phillips curve 
B)  as a shift to the right of the short-run Phillips curve 
C)  as a downward movement along the short-run Phillips curve 
D)  as a shift to the left of the short-run Phillips curve

Question 14

Which of the following was the primary cause of the large increase in oil prices in the 1970s?

Accepted Answer

A)  an increase in demand for oil 
B)  the introduction of the National Energy Program 
C)  a decrease in the supply of oil by OPEC 
D)  an increase in the supply of oil by OPEC

Question 15

Discuss the advantages and disadvantages of drawing the AD-AS model in terms of inflation (ð) and rate of growth (g).

Accepted Answer

The answer of Discuss the advantages and disadvantages of drawing...

Question 16

If macroeconomic policy expands aggregate demand, unemployment will fall and inflation will rise in the short run.

Accepted Answer

A) True 
 B)False

Question 17

If policymakers reduce aggregate demand, what happens to inflation and unemployment?

Accepted Answer

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

Question 18

According to the Friedman-Phelps analysis, in the long run, actual inflation equals expected inflation, and unemployment is at its natural rate.

Accepted Answer