Question 1

Figure 16-2 
-Refer to Figure 16-2. If the economy starts at c and the money supply growth rate decreases, where does the economy move to in the short run?

Accepted Answer

A) b 
B) d 
C) e 
D) either b or e

Question 2

In which of the following situations will the economy move to a point on the Phillips curve where unemployment is higher?

Accepted Answer

A) if the inflation rate increases 
B) if the government increases its expenditures 
C) if the Bank of Canada decreases the money supply 
D) if expected inflation increases

Question 3

Which of the following is the misery index supposed to measure?

Accepted Answer

A) the social cost of unemployment 
B) the health of the economy 
C) the lost output associated with a particular unemployment rate 
D) the short-run tradeoff between inflation and unemployment

Question 4

According to Phelps and Friedman, in the short run, what effect does an increase in the money supply have on prices and unemployment?

Accepted Answer

A) It raises prices and unemployment. 
B) It raises prices and reduces unemployment. 
C) It reduces prices and raises unemployment. 
D) It reduces prices and unemployment.

Question 5

Some countries have had high inflation rates for a long time and other countries have had low inflation rates for a long time. Yet in some of the high-inflation countries, the unemployment rate is not much different or even higher than in the low-inflation countries. Explain how these observations can be consistent with the Phillips curve.

Accepted Answer

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

Question 6

Suppose that a small economy that depends mostly on agriculture experiences a year with exceptionally good conditions for growing crops. What would the good weather do to the short-run aggregate supply curve and the short-run Phillips curve?

Accepted Answer

A) It would shift both the short-run aggregate supply curve and the short-run Phillips curve right. 
B) It would shift both the short-run aggregate supply curve and the short-run Phillips curve left. 
C) It would shift the short-run aggregate supply curve to the right, and the short-run Phillips curve to the left. 
D) It would shift the short-run aggregate supply curve to the left, and the short-run Phillips curve to the right.

Question 7

Which of the following terms refers to the short-run relationship between inflation and unemployment?

Accepted Answer

A) the classical dichotomy 
B) money neutrality 
C) the Phillips curve 
D) the Keynesian cross

Question 8

According to Samuelson and Solow, when aggregate demand is low, how are unemployment, wages, and prices affected?

Accepted Answer

A) Unemployment is high, so there is upward pressure on wages and prices. 
B) Unemployment is high, so there is downward pressure on wages and prices. 
C) Unemployment is low, so there is upward pressure on wages and prices. 
D) Unemployment is low, so there is downward pressure on wages and prices.

Question 9

Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.

Accepted Answer

The answer of Are the effects of an increase in...

Question 10

Suppose that monetary policymakers announced that they were going to make a serious effort to fight inflation. A few years later the inflation rate has been reduced, but there had also been a serious recession. Which of the following could we conclude with certainty?

Accepted Answer

A) We could conclude that the rational expectations hypothesis is false. 
B) We could conclude that the rational expectations hypothesis is true. 
C) We could conclude that the policymakers lacked credibility. 
D) No conclusion about the rational expectations theory or the policymakers' credibility can be drawn with certainty.

Question 11

What happened to expected inflation in Canada during the 1970s?

Accepted Answer

A) It rose substantially. 
B) It rose slightly. 
C) It fell slightly. 
D) It fell substantially.

Question 12

When aggregate demand increases, what happens to prices and employment?

Accepted Answer

A) Prices will fall and unemployment will rise. 
B) Prices and unemployment fall. 
C) Prices and unemployment rise. 
D) Prices will rise and unemployment will fall.

Question 13

Figure 16-3 
-Refer to Figure 16-3. When would the economy move from c and 3 to b and 2?

Accepted Answer

A) in the short run if money supply growth increased unexpectedly 
B) in the short run if money supply growth decreased unexpectedly 
C) in the long run if money supply growth increased 
D) in the long run if money supply growth decreased

Question 14

A policy change that reduced the natural rate of unemployment would shift both the long-run aggregate-supply curve and the long-run Phillips curve left.

Accepted Answer

A) True 
 B)False

Question 15

Figure 16-2 
-Refer to Figure 16-2. If the economy starts at c and the money supply growth rate increases, where does the economy move to in the long run?

Accepted Answer

A) b 
B) d 
C) e 
D) either b or e

Question 16

If there is a favourable supply shock, which of the following will most likely happen?

Accepted Answer

A) The aggregate supply curve and the short-run Phillips curve will both shift right. 
B) The aggregate supply curve and the short-run Phillips curve will both shift left. 
C) The aggregate supply curve will shift right, and the short-run Phillips curve will shift left. 
D) The aggregate supply curve will shift left, and the short-run Phillips curve will shift right.

Question 17

Some economists argue that simply and suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real reform so that people expect that the government will soon start printing more money again to pay for its expenditures, the promise to fight inflation will not be credible. Explain the importance of an inflation reduction policy that is announced ahead of time and is credible.

Accepted Answer

The answer of Some economists argue that simply and suddenly...

Question 18

Suppose the long-run Phillips curve shifts to the left. For any given rate of money growth and inflation, how would unemployment and output change?

Accepted Answer

A) Unemployment would be higher, and output would be lower. 
B) Unemployment would be higher, and output would be higher. 
C) Unemployment would be lower, and output would be lower. 
D) Unemployment would be lower, and output would be higher.

Question 19

Suppose a war disrupts the supply of oil to the country. What would we expect to happen to the short-run aggregate supply curve, the short-run Phillips curve, and the long-run Phillips curve?

Accepted Answer

A) We would expect the short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift left. 
B) We would expect the short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift right. 
C) We would expect the short-run aggregate supply curve to shift left, and the short-run Phillips curve and long-run Phillips curve to shift right. 
D) We would expect the short-run aggregate supply curve to shift left, the short-run Phillips curve to shift right, and the long-run Phillips curve to be unaffected.

Question 20

According to Friedman and Phelps, when is the unemployment rate above the natural rate?

Accepted Answer

A) when actual inflation is greater than expected inflation 
B) when actual inflation is less than expected inflation 
C) when actual inflation equals expected inflation 
D) when actual inflation is high

Exam 16: The Short-Run Tradeoff Between Inflation and Unemployment

Figure 16-2 -Refer to Figure 16-2. If the economy starts at c and the money supply growth rate decreases, where does the economy move to in the short run?