Question 1

Figure 28.4.1
Use the figure below to answer the following questions.
 
-Refer to Figure 28.4.1. The figure illustrates an economy's Phillips curves. What is the natural unemployment rate?

Accepted Answer

A) 9 percent 
B) 6 percent 
C) 4 percent 
D) 7 percent 
E) cannot be determined without more information

Question 2

A forecast that is based on all the relevant information available is

Accepted Answer

A) usually no better than a random guess given that the future bears many uncertainties. 
B) usually accurate. 
C) called a rational expectation. 
D) useful only in the prediction of cost-push inflation. 
E) useful only in the prediction of demand-pull inflation.

Question 3

At full employment, an increase in the quantity of money (ceteris paribus)can start

Accepted Answer

A) demand-pull inflation, as can an increase in government expenditure. 
B) demand-pull inflation, but an increase in government expenditure cannot. 
C) cost-push inflation, as can an increase in government expenditure. 
D) cost-push inflation, but an increase in government expenditure cannot. 
E) demand-pull and a cost-push inflation, as can an increase in government expenditure.

Question 4

According to real business cycle theory, a fall in the real interest rate ________ the supply of labour and ________ employment.

Accepted Answer

A) decreases; decreases 
B) increases; increases 
C) decreases; increases 
D) increases; decreases 
E) does not change; does not change

Question 5

The key ripple effect in real business cycle theory is the ________ decision and it depends on the ________.

Accepted Answer

A) when-to-invest; real interest rate 
B) when-to-work; real interest rate 
C) what-to-save; nominal interest rate 
D) where-to-work; real wage rate 
E) when-to-work; rigidity of the money wage rate

Question 6

If the natural unemployment rate increases, the long-run Phillips curve ________, the short-run Phillips curve ________, and the expected inflation rate ________.

Accepted Answer

A) does not shift; does not shift; does not change 
B) shifts rightward; shifts rightward; does not change 
C) does not shift; shifts rightward; rises 
D) shifts rightward; curve does not shift; falls 
E) shifts rightward; shifts rightward; falls

Question 7

The Canadian short-run Phillips curve ________ when the expected inflation rate rises and ________ when the expected inflation rate falls. The Canadian short-run Phillips curve ________ when the natural unemployment rate increases and ________ when the natural unemployment rate decreases.

Accepted Answer

A) shifts downward; shifts upward; shifts rightward; shifts leftward 
B) does not shift; does not shift; shifts rightward; shifts leftward 
C) shifts upward; shifts downward; does not shift; does not shift 
D) shifts upward; shifts downward; shifts rightward; shifts leftward 
E) shifts upward; does not shift; shifts rightward; does not shift

Question 8

Suppose the quantity of money is expected to remain unchanged but it actually increases. The price level

Accepted Answer

A) rises and real GDP increases. 
B) rises and real GDP decreases. 
C) falls and real GDP increases. 
D) falls and real GDP decreases. 
E) rises and real GDP stays the same.

Question 9

A cost-price inflation spiral results if the policy response to stagflation is to keep

Accepted Answer

A) decreasing aggregate demand. 
B) decreasing short-run aggregate supply. 
C) increasing aggregate demand. 
D) increasing short-run aggregate supply. 
E) doing nothing.

Question 10

Table 28.4.2
 
-The economy's natural unemployment rate is 4 percent. Table 28.4.2 gives some points on the economy's short-run Phillips curve. When the unemployment rate is 4 percent,

Accepted Answer

A) actual inflation is greater than expected inflation. 
B) actual inflation is less than expected inflation. 
C) and the inflation rate is 6 percent a year, the short-run and long-run Phillips curves intersect. 
D) and the expected inflation rate is 8 percent a year, the short-run Phillips curve shifts downward. 
E) aggregate demand increases.

Question 11

The key difference between new classical cycle theory and new Keynesian cycle theory is that the new classical cycle theory believes that ________ while the new Keynesian cycle theory believes that ________.

Accepted Answer

A) expected changes in aggregate demand change real GDP; expected changes in aggregate demand do not change real GDP 
B) only unexpected changes in aggregate demand change real GDP; only expected changes in aggregate demand change real GDP 
C) only unexpected changes in aggregate demand change real GDP; both expected and unexpected changes in aggregate demand change real GDP 
D) the short-run aggregate supply curve is horizontal; the short-run aggregate supply curve is vertical. 
E) expected and unexpected changes in aggregate demand change real GDP; only changes in labour productivity change aggregate demand

Question 12

Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that creates business cycles?
I. Keynesian cycle theory
II. real business cycle theory
III. monetarist cycle theory

Accepted Answer

A) I only 
B) I and II 
C) I and III 
D) I, II and III 
E) II and III

Question 13

Stagflation can result from

Accepted Answer

A) a leftward shift of the demand curve. 
B) a rightward shift of the demand curve. 
C) a leftward shift of the short-run aggregate supply curve. 
D) a rightward shift of the short-run aggregate supply curve. 
E) a rightward shift of the long-run aggregate supply curve.

Question 14

Figure 28.2.4
Use the figure below to answer the following question.
 
-Refer to Figure 28.2.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level?

Accepted Answer

A) 100 
B) 120 
C) 130 
D) 150 
E) We cannot tell without more information on wage negotiations.

Question 15

Deflation ends with

Accepted Answer

A) an increase in the growth rate of the money stock. 
B) a one-time increase in the quantity of money. 
C) a rise in the interest rate. 
D) a decrease in the growth rate of the money stock. 
E) a one-time decrease in the quantity of money.

Question 16

Real business cycle theorists believe that the intertemporal substitution effect ________. Many other economists believe that the intertemporal substitution effect ________.

Accepted Answer

A) is large; is negligible 
B) is negligible; is large 
C) occurs in the money market; occurs in the labour market 
D) occurs in the labour market; occurs in the money market 
E) none of the above

Question 17

Cost-push inflation can result from an initial

Accepted Answer

A) decrease in personal income taxes. 
B) increase in personal income taxes. 
C) increase in government expenditure. 
D) increase in the money wage rate. 
E) increase in transfer payments.

Question 18

Figure 28.2.2
Use the figure below to answer the following questions.
 
-Refer to Figure 28.2.2. Consider the market for labour as the short-run aggregate supply curve shifts leftward from SAS₀ to SAS₁. This shift could have been the result of an agreement between workers and employers for a

Accepted Answer

A) 10 percent decrease in the money wage rate. 
B) 10 percent increase in the money wage rate. 
C) 15 percent decrease in the money wage rate. 
D) 15 percent increase in the money wage rate. 
E) 10 percent increase in the real wage rate.

Question 19

Choose the statement that is incorrect.

Accepted Answer

A) In a deflation, the inflation rate is positive but decreasing in consequent years. 
B) In a deflation, the price level persistently falls. 
C) A one-time fall in the price level occurs when there is an increase in capital that increases potential GDP. 
D) A one-time fall in the price level occurs either because aggregate demand decreases or because short-run aggregate supply increases. 
E) A one-time fall in the price level is not a deflation.

Question 20

Fact 28.4.1 Eurozone Unemployment Hits Record High As Inflation Rises Unexpectedly
Eurozone unemployment rose to 10.7 percent. At the same time, Eurozone inflation unexpectedly rose to 2.7 percent a year, up from the previous month's 2.6 percent a year.
Source: Huffington Post, March 1, 2012
-Consider Fact 28.4.1. A very high unemployment rate can be accounted for by the Phillips curve model by all of the following except

Accepted Answer

A) a movement down along the short-run Phillips curve if there is no change in the natural unemployment rate. 
B) a rightward shift of the short-run Phillips curve if the natural unemployment rate increases. 
C) a rightward shift of the long-run Phillips curve if the natural unemployment rate increases. 
D) a movement up along the long-run Phillips curve if the natural unemployment rate increases. 
E) All of the above give explanations for a high unemployment rate.

Exam 28: The Business Cycle, Inflation, and Deflation

Figure 28.4.1 Use the figure below to answer the following questions. -Refer to Figure 28.4.1. The figure illustrates an economy's Phillips curves. What is the natural unemployment rate?

A forecast that is based on all the relevant information available is

At full employment, an increase in the quantity of money (ceteris paribus) can start

According to real business cycle theory, a fall in the real interest rate the supply of labour and employment.

The key ripple effect in real business cycle theory is the decision and it depends on the .

If the natural unemployment rate increases, the long-run Phillips curve , the short-run Phillips curve , and the expected inflation rate .

The Canadian short-run Phillips curve when the expected inflation rate rises and when the expected inflation rate falls. The Canadian short-run Phillips curve when the natural unemployment rate increases and when the natural unemployment rate decreases.

Suppose the quantity of money is expected to remain unchanged but it actually increases. The price level

A cost-price inflation spiral results if the policy response to stagflation is to keep

Table 28.4.2 -The economy's natural unemployment rate is 4 percent. Table 28.4.2 gives some points on the economy's short-run Phillips curve. When the unemployment rate is 4 percent,

The key difference between new classical cycle theory and new Keynesian cycle theory is that the new classical cycle theory believes that while the new Keynesian cycle theory believes that .

Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that creates business cycles? I. Keynesian cycle theory II. real business cycle theory III. monetarist cycle theory

Stagflation can result from

Figure 28.2.4 Use the figure below to answer the following question. -Refer to Figure 28.2.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level?

Deflation ends with

Real business cycle theorists believe that the intertemporal substitution effect . Many other economists believe that the intertemporal substitution effect .

Cost-push inflation can result from an initial

Figure 28.2.2 Use the figure below to answer the following questions. -Refer to Figure 28.2.2. Consider the market for labour as the short-run aggregate supply curve shifts leftward from SAS₀ to SAS₁. This shift could have been the result of an agreement between workers and employers for a

Choose the statement that is incorrect.