Question 1

-Refer to Exhibit 6 above.Suppose the economy is operating at point D.As people revise their price expectations,

Accepted Answer

A) the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 3 per cent inflation. 
B) the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 9 per cent inflation. 
C) the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 6 per cent inflation. 
D) the long run Phillips curve will shift to the left.

Question 2

According to the theory of rational expectations,

Accepted Answer

A) workers' experience tells them that government action to lower unemployment will not affect inflation. 
B) consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects. 
C) policy goals can be achieved more easily in the short run than in the long run. 
D) workers' wage demands include anticipated inflation.

Question 3

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Accepted Answer

A) True 
 B)False

Question 4

The natural rate of unemployment is

Accepted Answer

A) the socially desired rate of unemployment. 
B) the unemployment rate that is observed in the long run regardless of the monetary policy pursued by the central bank. 
C) the unemployment rate that is observed in the long run regardless of all economic policies pursued by the government or central bank. 
D) always below 5 per cent.

Question 5

If people expect less inflation in the future, then the

Accepted Answer

A) long run Phillips curve will become steeper. 
B) long run Phillips curve will become flatter. 
C) short run Phillips curve will become steeper. 
D) short run Phillips curve will shift down and to the left.

Question 6

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Accepted Answer

A) reduce inflation with little or no increase in unemployment. 
B) increase inflation but it would decrease unemployment by an unusually large amount. 
C) increase inflation with little or no decrease in unemployment. 
D) reduce inflation but it would increase unemployment by an unusually large amount.

Question 7

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Accepted Answer

A) the Phillips curve was upward sloping, not downward sloping as first thought. 
B) there was no trade-off between inflation and unemployment in the long run. 
C) the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation. 
D) the aggregate supply curve actually sloped downward because price levels fell when real GDP rose.

Question 8

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

Accepted Answer

A) a reduction in output of 5 per cent. 
B) a reduction in output of 15 per cent. 
C) a reduction in output of 20 per cent. 
D) a reduction in output of 35 per cent.

Question 9

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following will reduce the price level and increase real output in the long run?

Accepted Answer

A) An increase in the money supply. 
B) An increase in wage rates. 
C) A decrease in the money supply. 
D) Technical progress.

Question 11

-Refer to Exhibit 6 above.Suppose the economy is in long run equilibrium at point E.A sudden increase in government spending should move the economy in the direction of point

Accepted Answer

A) A. 
B) B. 
C) D. 
D) E. 
E) G.

Question 12

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation.If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Accepted Answer

A) 5 per cent. 
B) 2 per cent. 
C) 12 per cent. 
D) None of the above is correct.

Question 13

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...

Question 14

According to the theory of rational expectations,

Accepted Answer

A) the Phillips curve is upward sloping in the short run and downward sloping in the long run. 
B) both in the short and long run, the Phillips curve is horizontal. 
C) the sacrifice ratio could be zero because economic agents will very quickly adjust their inflation expectations if they believe policy makers will succeed in reducing inflation. 
D) the sacrifice ratio is very high because rational workers will work less if their wages do not rise as quickly as they expect.

Question 15

-Refer to Exhibit 6 above.If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent, the economy is operating at point

Accepted Answer

A) A. 
B) B. 
C) E. 
D) H. 
E) I.

Question 16

Along a short run Phillips curve, a higher rate of

Accepted Answer

A) growth in output is associated with a higher unemployment rate. 
B) growth in output is associated with a lower unemployment rate. 
C) inflation is associated with a higher unemployment rate. 
D) inflation is associated with a lower unemployment rate.

Question 17

Some countries have had relatively high inflation and relatively high unemployment for long periods of time.Is this consistent with the Phillips curve? Defend your answer.

Accepted Answer

The answer of Some countries have had relatively high inflation...

Question 18

When actual inflation exceeds expected inflation,

Accepted Answer

A) unemployment is equal to the natural rate of unemployment. 
B) people will reduce their expectations of inflation in the future. 
C) unemployment is greater than the natural rate of unemployment. 
D) unemployment is less than the natural rate of unemployment.

Question 19

Why does a downward sloping Phillips curve imply a positive sacrifice ratio?

Accepted Answer

The answer of Why does a downward sloping Phillips curve...

Question 20

The Phillips curve and the short run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward.Discuss.

Accepted Answer

The answer of The Phillips curve and the short run...

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

-Refer to Exhibit 6 above.Suppose the economy is operating at point D.As people revise their price expectations,

According to the theory of rational expectations,

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

The natural rate of unemployment is

If people expect less inflation in the future, then the

If people have rational expectations, a monetary policy contraction that is announced and is credible could

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Which of the following will reduce the price level and increase real output in the long run?

-Refer to Exhibit 6 above.Suppose the economy is in long run equilibrium at point E.A sudden increase in government spending should move the economy in the direction of point

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation.If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

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

According to the theory of rational expectations,

-Refer to Exhibit 6 above.If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent, the economy is operating at point

Along a short run Phillips curve, a higher rate of

Some countries have had relatively high inflation and relatively high unemployment for long periods of time.Is this consistent with the Phillips curve? Defend your answer.

When actual inflation exceeds expected inflation,

Why does a downward sloping Phillips curve imply a positive sacrifice ratio?

The Phillips curve and the short run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward.Discuss.