Question 1

The shape of the long-run aggregate supply curve implies that, in the long run, _____.

Accepted Answer

A)  inﬂation and GDP are negatively related 
B)  the rate of inﬂation is constant 
C)  inﬂation increases faster than nominal wages 
D)  output is inﬂation inelastic.

Question 2

An economy's potential GDP is deﬁned as the level of output:

Accepted Answer

A)  that is produced when all factors of production that are willing to be employed are being used. 
B)  that is produced when the economy operates at a point under its production possibility 
C)  that can be produced when all factors of production are employed in equal proportions. 
D)  that is produced in the economy in the short run.

Question 3

Which of the following illustrates an increase in the full employment level of GDP?

Accepted Answer

A)  An upward movement along the long-run aggregate supply curve. 
B)  A downward movement along the long-run aggregate supply curve. 
C)  A leftward shift of the long-run aggregate supply curve. 
D)  A rightward shift of the long-run aggregate supply curve.

Question 4

According to the Phillips curve analysis, a fall in inﬂationary expectations in an economy would:

Accepted Answer

A)  lead to higher nominal wages in the long run. 
B)  not affect unemployment in the long run. 
C)  lead to an increase in unemployment in the long run. 
D)  increase the real wage in the long run.

Question 5

Rigidities in the adjustment process to full long-run equilibrium arise when:

Accepted Answer

A)  there is agreement among ﬁrms and workers that the inﬂation target is low. 
B)  inﬂationary expectations are aligned with target rates. 
C)  inﬂationary expectations veer away from target rates. 
D)  long-term concerns about inﬂation seem to play a bigger role in economic decision

Question 6

It is easier for the central bank of an economy to target inﬂation when faced with supply-side shocks rather than demand-side shocks.

Accepted Answer

A) True 
 B)False

Question 7

What is real wage?

Accepted Answer

A)  The level of wages earned by workers after accounting for taxes. 
B)  The total wages earned by all the workers in the economy. 
C)  The wage that could be earned by someone if they moved to a better job. 
D)  The nominal wage that has been adjusted for in?ation.

Question 8

Between 2001 and 2008, earnings growth in the UK has been lower than the rate of inﬂation.

Accepted Answer

A) True 
 B)False

Question 9

The level of GDP associated with the long run is called _____.

Accepted Answer

A)  actual GDP 
B)  potential GDP 
C)  surplus GDP 
D)  deﬁcit GDP

Question 10

The trade off between unemployment and inﬂation shown by the Phillips curve is a short run outcome.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following correctly represents the Taylor rule?

Accepted Answer

A)  i = Π + i* + a(Π - Π*) / b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation rate, GDP* is the potential GDP, and i* is the real interest rate. 
B)  i = Π + i* + a(Π - Π*) + b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation 
C)  i = Π + i* + a(Π - Π*) - b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation rate, GDP* is the potential GDP, and i* is the real interest rate. 
D)  i = Π + i* + a(Π - Π*) * b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation

Question 12

The lesser the resistance to price and wage changes, the swifter an economy will return to equilibrium.

Accepted Answer

A) True 
 B)False

Question 13

What are the views of the new classical economists and the gradual monetarists with regards to the speed of adjustment of an economy to long-run equilibrium?

Accepted Answer

The answer of What are the views of the new...

Question 14

Through interest rates, there is a negative relationship between inﬂation and aggregate demand.

Accepted Answer

A) True 
 B)False

Question 15

When the short run GDP and the long run GDP coincide, then there exists an output gap in the economy.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following explains why an economy that has moved away from long-run equilibrium due to a fall in aggregate demand should avoid deﬂation?

Accepted Answer

A)  Deﬂation causes a rightward shift in the short-run aggregate supply curve. 
B)  Deﬂation is usually accompanied by an increase in employment. 
C)  Encouraged by lower prices, households increase the demand for goods and services. 
D)  Consumers often postpone consumption in the expectation that prices will fall further.

Question 17

Explain the real business cycle effect graphically.

Accepted Answer

The answer of Explain the real business cycle effect graphically....

Question 18

What does the short-run Phillips curve show?

Accepted Answer

The answer of What does the short-run Phillips curve show?...

Question 19

Consider an economy that is operating at the intersection of the long-run and short-run Phillips curve. The level of inﬂation is 2.5 per cent, while the level of unemployment is 3.8 per cent. This implies that:

Accepted Answer

A)  the economy is operating at a point inside its production possibility frontier. 
B)  any increase in interest rates at this point will move the economy up along the short-run 
C)  any increase in aggregate demand at this point will move the economy down along the short-run Phillips curve. 
D)  the natural rate of unemployment in this economy is 3.8 per cent.

Question 20

What is the short-run effect of a temporary supply shock?

Accepted Answer

A)  The level of in?ation will be lower while output increases. 
B)  The level of output and in?ation both increase. 
C)  The level of in?ation will be higher but output remains the same. 
D)  The level of in?ation will be higher while output declines.

Exam 13: Inflation, Output and Economic Policy

The shape of the long-run aggregate supply curve implies that, in the long run, _____.

An economy's potential GDP is deﬁned as the level of output:

Which of the following illustrates an increase in the full employment level of GDP?

According to the Phillips curve analysis, a fall in inﬂationary expectations in an economy would:

Rigidities in the adjustment process to full long-run equilibrium arise when:

It is easier for the central bank of an economy to target inﬂation when faced with supply-side shocks rather than demand-side shocks.

What is real wage?

Between 2001 and 2008, earnings growth in the UK has been lower than the rate of inﬂation.

The level of GDP associated with the long run is called _____.

The trade off between unemployment and inﬂation shown by the Phillips curve is a short run outcome.

Which of the following correctly represents the Taylor rule?

The lesser the resistance to price and wage changes, the swifter an economy will return to equilibrium.

What are the views of the new classical economists and the gradual monetarists with regards to the speed of adjustment of an economy to long-run equilibrium?

Through interest rates, there is a negative relationship between inﬂation and aggregate demand.

When the short run GDP and the long run GDP coincide, then there exists an output gap in the economy.

Which of the following explains why an economy that has moved away from long-run equilibrium due to a fall in aggregate demand should avoid deﬂation?

Explain the real business cycle effect graphically.

What does the short-run Phillips curve show?

Consider an economy that is operating at the intersection of the long-run and short-run Phillips curve. The level of inﬂation is 2.5 per cent, while the level of unemployment is 3.8 per cent. This implies that:

What is the short-run effect of a temporary supply shock?