Question 1

If the natural rate of unemployment falls,

Accepted Answer

A) both the short-run Phillips curve and the long-run Phillips curve shift. 
B) only the short-run Phillips curve shifts. 
C) only the long-run Phillips curve shifts. 
D) neither the short-run nor the long-run Phillips curves shift.

Question 2

In the 1970's the Federal Reserve responded to an adverse supply shock. Its policy made

Accepted Answer

A) the recession that followed smaller and so provided a more favorable tradeoff between inflation and unemployment. 
B) the recession that followed smaller, but in doing so produced a less favorable tradeoff between inflation and unemployment. 
C) the recession that followed larger, but in doing so provided a more favorable tradeoff between inflation and unemployment. 
D) the recession that followed larger and also produced a less favorable tradeoff between inflation and unemployment.

Question 3

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 4

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

A) could be high because it was rational for people not to immediately change their expectations. 
B) could be high because people might adjust their expectations quickly if they found anti-inflation policy credible. 
C) could be low because it was rational for people not to immediately change their expectations. 
D) could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

Question 5

Disinflation is like

Accepted Answer

A) slowing a car down, whereas deflation is like putting the car into reverse gear. 
B) maintaining a car's speed, whereas deflation is like slowing the car down. 
C) putting a car into reverse gear, whereas deflation is like slowing the car down. 
D) maintaining a car's speed, whereas deflation is like putting the car into reverse gear.

Question 6

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of

Accepted Answer

A) adverse supply shocks that shifted the short-run Phillips curve left. 
B) adverse supply shocks that shifted the short-run Phillips curve right. 
C) favorable supply shocks that shifted the short-run Phillips curve left. 
D) favorable supply shocks that shifted the short-run Phillips curve right.

Question 7

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

Accepted Answer

A) should not see an increase in the unemployment rate even in the short run. 
B) will having rising unemployment for a while, but then return to the natural rate of unemployment. 
C) will have a permanently higher unemployment rate. 
D) None of the above is suggested by the arguments of Friedman and Phelps.

Question 8

Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following describes the Volcker disinflation most accurately?

Accepted Answer

A) Almost all of the public believed that the Fed would keep money growth low, so unemployment rose less than it would have otherwise. 
B) Almost all of the public believed that the Fed would keep money growth low, so unemployment rose more than it would have otherwise. 
C) Much of the public did not believe that the Fed would keep money growth low, so unemployment rose less than it would have otherwise. 
D) Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise.

Question 10

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

Accepted Answer

A) both the short and long run. 
B) the short run, but not the long run. 
C) the long run, but not the short run. 
D) neither the short nor the long run.

Question 11

The consequences of the Volcker disinflation demonstrated that when Volcker announced his intention to reduce inflation quickly, on average the public thought

Accepted Answer

A) he would try to fool them by raising inflation to decrease unemployment. 
B) inflation would be unchanged. 
C) inflation would fall but not by as much or as quickly as Volcker claimed. 
D) inflation would fall even further than Volcker was willing to admit.

Question 12

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in

Accepted Answer

A) the long run and the short run. 
B) the long run but not the short run. 
C) the short run but not the long run. 
D) neither the short run nor the long run.

Question 13

A movement to the right along a given short-run Phillips curve could be caused by

Accepted Answer

A) an increase in the natural rate of unemployment or expansionary monetary policy. 
B) expansionary monetary policy, but not an increase in the natural rate of unemployment. 
C) an increase in the natural rate of unemployment or a contractionary monetary policy. 
D) contractionary monetary policy, but not an increase in the natural rate of unemployment.

Question 14

Figure 22-3. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate. 
-Refer to Figure 22-3. What is measured along the vertical axis of the right-hand graph?

Accepted Answer

A) the interest rate 
B) the inflation rate 
C) the government's budget deficit as a percent of GDP 
D) the growth rate of the nominal money supply

Question 15

An event that directly affects firms' costs of production and thus the prices they charge is called

Accepted Answer

A) a Phillips contraction. 
B) an inflationary spiral. 
C) a demand shock. 
D) a supply shock.

Question 16

In response to the financial crisis of 2007-2008, policymakers used

Accepted Answer

A) expansionary monetary policy and expansionary fiscal policy. 
B) expansionary monetary policy and contractionary fiscal policy. 
C) contractionary monetary policy and expansionary fiscal policy. 
D) contractionary monetary policy and contractionary fiscal policy.

Question 17

Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply. They make reforms to lower inflation from its current rate of 8%. Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%. Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%. Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%, show the initial long run equilibrium of Veridian and label it "A". Assuming that the government had actually set inflation at 2% and that the public believed this, label the long-run equilibrium "B". Now, suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%. Show the short-run equilibrium and label it "C". If the money supply continues to grow at a rate consistent with 4% inflation, show where the economy ends up and label that point "D".

Accepted Answer

The answer of Suppose that the Prime Minister and Parliament...

Question 18

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

Accepted Answer

A) both the unemployment rate and the inflation rate would be lower. 
B) the unemployment rate would be lower and the inflation rate would be higher. 
C) the unemployment rate would be higher and the inflation rate would be lower. 
D) the unemployment rate and the inflation rate would be higher.

Question 19

Assume the analysis of Friedman and Phelps is correct, so that the following equation is valid: Unemployment rate = Natural rate of unemployment - a * ctual inflation - x).In this equation,

Accepted Answer

A) a is a parameter that measures how much actual inflation responds to expected inflation. 
B) a = 0 at the point of intersection of the short-run and long-run Phillips curves. 
C) x is the expected rate of inflation. 
D) All of the above are correct.

Question 20

Moving from the late 1960s to 1970-1973,

Accepted Answer

A) inflation remained high while the unemployment rate was lower than in the late 1960s. 
B) inflation remained high while the unemployment rate was higher than in the late 1960s. 
C) inflation remained low while the unemployment rate was lower than in the late 1960s. 
D) inflation remained low while the unemployment rate was higher than in the late 1960s.

Exam 22: The Short-Run Trade-Off Between Inflation and Unemployment