Question 1

Conducting expansionary monetary policy when the economy is at its long-run equilibrium causes the Phillips curve to:

Accepted Answer

A)  shift straight up. 
B)  shift straight down. 
C)  become less steep. 
D)  become steeper.

Question 2

The graph shown displays various price and output levels in an economy.  If the economy is currently at point E2, what could be said about its unemployment?

Accepted Answer

A)  There is higher unemployment than the natural rate. 
B)  There is lower unemployment than the natural rate. 
C)  The unemployment rate is near the natural rate. 
D)  The unemployment rate is zero.

Question 3

The aggregate price level is:

Accepted Answer

A)  a measure of the average price level for GDP. 
B)  measured by the CPI. 
C)  measured by the GDP price deflator. 
D)  All of these statements are true.

Question 4

A period during which overall inflation rates are positive but falling is:

Accepted Answer

A)  disinflation. 
B)  deflation. 
C)  inflation. 
D)  zero price level.

Question 5

According to the quantity theory of money, increasing the money supply:

Accepted Answer

A)  leads to inflation. 
B)  increases production. 
C)  leads to decreased spending. 
D)  decreases the velocity of money.

Question 6

The money value of goods or services sold is measured in:

Accepted Answer

A)  nominal values. 
B)  real values. 
C)  aggregated values. 
D)  intermediate values.

Question 7

If L.L.Bean decides to increase its prices due to general inflation, it must reprint the millions of catalogs it has already produced and distributed. The costs associated with recreating these catalogs would be classified as:

Accepted Answer

A)  menu costs. 
B)  shoe-leather costs. 
C)  tax distortions. 
D)  printing costs.

Question 8

If an economy produces 5,000 units of output when the price level is $1 and the velocity of money is 4, what is the money supply?

Accepted Answer

A)  $4,000 
B)  $1,250 
C)  $2,500 
D)  $5,000

Question 9

If the average price level increases 10 percent per year, and the velocity of money is 2, then the inflation rate is:

Accepted Answer

A)  10 percent. 
B)  5 percent. 
C)  2 percent. 
D)  20 percent.

Question 10

The line that shows the connection between inflation and unemployment in the short run is called the:

Accepted Answer

A)  Phillips curve. 
B)  inflation-employment trade-off. 
C)  price-work curve. 
D)  aggregate supply curve.

Question 11

The idea that changes in aggregate price levels do not affect real outcomes in the economy is called the:

Accepted Answer

A)  neutrality of money. 
B)  aggregate price theory. 
C)  neutrality of prices. 
D)  real output theory.

Question 12

If the Fed doubled the money supply in one day, the amount of goods and services traded would:

Accepted Answer

A)  not change. 
B)  increase. 
C)  decrease. 
D)  fall to zero.

Question 13

The velocity of money is:

Accepted Answer

A)  the number of transactions a typical dollar is used in during a given period. 
B)  the number of goods a typical dollar can buy in a given period. 
C)  how quickly money is created through the financial system. 
D)  how quickly consumers spend their wages.

Question 14

Khiem earns $50,000 per year and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, his pay increases to $55,000, which puts him in a higher tax bracket where he must now pay 20 percent. Khiem has experienced:

Accepted Answer

A)  bracket costs. 
B)  the deflationary cost of tax distortion. 
C)  an increase in his purchasing power. 
D)  the inflationary cost of tax distortion.

Question 15

If an economy has a money supply of $200, a velocity of money of 12, and a price level of $2, how many units of output does it produce?

Accepted Answer

A)  1,200 
B)  2,400 
C)  600 
D)  6,000

Question 16

Headline inflation:

Accepted Answer

A)  includes all of the goods the average consumer buys. 
B)  is based on the CPI basket of goods. 
C)  core inflation plus the prices of food and energy. 
D)  All of these statements are true.

Question 17

The lowest possible unemployment rate that will not cause the inflation rate to increase is called:

Accepted Answer

A)  the nonaccelerating inflation rate of unemployment (NAIRU). 
B)  the natural rate of unemployment. 
C)  full employment. 
D)  All of these are true.

Question 18

When an economy is producing at its potential level of output:

Accepted Answer

A)  cyclical unemployment is not occurring. 
B)  structural unemployment is not occurring. 
C)  frictional unemployment is not occurring. 
D)  there is no unemployment.

Question 19

According to the quantity theory of money, a decrease in prices would occur due to:

Accepted Answer

A)  a decrease in the money supply. 
B)  an increase in the money supply. 
C)  a decrease in the production of output. 
D)  an increase in the production of output.

Question 20

If the Fed were to allow unemployment to remain at a higher level than the NAIRU:

Accepted Answer

A)  it could lead to deflation. 
B)  inflation would likely occur. 
C)  to the economy would not maintain full employment. 
D)  monetary policy would not be effective.

Exam 16: Inflation