Question 1

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 2

A country is likely to have a higher sacrifice ratio if

Accepted Answer

A) Contracts are shorter,and people believe the central bank will reduce inflation. 
B) Contracts are longer,and people believe the central bank will not reduce inflation 
C) Contracts are longer,and people believe the central bank will reduce inflation. 
D) Contracts are shorter,and people believe the central bank will not reduce inflation.

Question 3

In the late 1960s,Milton Friedman and Edmund Phelps argued that

Accepted Answer

A) the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run. 
B) the trade-off between inflation and unemployment did not apply in the long run.This claim is inconsistent with monetary neutrality in the long run. 
C) the trade-off between inflation and unemployment applied in both the short run and the long run.This claim is consistent with monetary neutrality in the long run. 
D) the trade-off between inflation and unemployment applied in both the short run and the long run.This claim is inconsistent with monetary neutrality in the long run.

Question 4

Samuelson and Solow argued that a combination of low unemployment and low inflation

Accepted Answer

A) was impossible given the historical data as summarized by the Phillips curve. 
B) could be achieved with an "appropriate" fiscal policy. 
C) could be achieved with an "appropriate" monetary policy. 
D) could be achieved with an "appropriate" mix of monetary and fiscal policies.

Question 5

If people eventually adjust their inflation expectations so that in the long run actual and expected inflation are the same,then policymakers

Accepted Answer

A) Can not exploit a tradeoff between inflation and unemployment in either the short or long run. 
B) Can exploit a tradeoff between inflation and unemployment in the short run but not in the long run. 
C) Can exploit a tradeoff between inflation and unemployment in both the short run and the long run. 
D) Can exploit a tradeoff between inflation and unemployment in the long run,but not the short run.

Question 6

In the Friedman-Phelps analysis,when inflation is less than expected,the unemployment rate is less than the natural rate.

Accepted Answer

A) True 
 B)False

Question 7

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 8

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 9

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

Accepted Answer

A) True 
 B)False

Question 10

If monetary policy moves unemployment below its natural rate,both expected and actual inflation will rise.

Accepted Answer

A) True 
 B)False

Question 11

In the long run,

Accepted Answer

A) the natural rate of unemployment depends primarily on the level of aggregate demand. 
B) inflation depends primarily upon the money supply growth rate. 
C) there is a tradeoff between the inflation rate and the natural rate of unemployment. 
D) All of the above are correct.

Question 12

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year,the sacrifice ratio is

Accepted Answer

A) 5/2. 
B) 3/2. 
C) 2/3. 
D) 2/5.

Question 13

A shock increases the costs of production.Given the effects of this shock,if the central bank wants to return the unemployment rate towards its previous level it would

Accepted Answer

A) increase the rate at which the money supply increases.This will also move inflation closer to its previous rate.. 
B) increase the rate at which the money supply increases.However,this will make inflation higher than its previous rate 
C) decrease the rate at which the money supply increases.This will also move inflation closer to its original rate 
D) decrease the rate at which the money supply increases.However,this will make higher than its previous rate.

Question 14

Figure 36-1.The left-hand graph shows a short-run aggregate-supply (SRAS)curve and two aggregate-demand (AD)curves.On the right-hand diagram,U represents the unemployment rate.  
-Refer to Figure 36-1.The curve that is depicted on the right-hand graph offers policymakers a "menu" of combinations

Accepted Answer

A) that applies both in the short run and in the long run. 
B) that is relevant to choices involving fiscal policy,but not to choices involving monetary policy. 
C) of inflation and unemployment. 
D) All of the above are correct.

Question 15

Figure 36-7
Use this graph to answer the questions below. 
-Refer to figure 36-7.Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%.Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy?

Accepted Answer

A) 7% unemployment and 1% inflation 
B) 7% unemployment and 3% inflation 
C) 3% unemployment and 5% inflation 
D) 3% unemployment and 7% inflation

Question 16

Figure 36-8.The left-hand graph shows a short-run aggregate-supply (SRAS)curve and two aggregate-demand (AD)curves.On the right-hand diagram,"Inf Rate" means "Inflation Rate."

-Refer to Figure 36-8.The shift of the aggregate-supply curve from AS1 to AS2

Accepted Answer

A) results in a more favorable trade-off between inflation and unemployment. 
B) results in a more favorable trade-off between inflation and the growth rate of real GDP. 
C) represents an adverse shock to aggregate supply. 
D) represents a favorable shock to aggregate supply.

Question 17

Which of the following leads to a lower level of unemployment in the long run?

Accepted Answer

A) both an increase in the size of the money supply and an increase in the money supply growth rate 
B) an increase in the size of the money supply but not an increase in the money supply growth rate 
C) an increase in the money supply growth rate,but not an increase in the size of the money supply 
D) neither an increase in the size of the money supply nor an increase in the money supply growth rate

Question 18

If the short-run Phillips curve were stable,which of the following would be unusual?

Accepted Answer

A) an increase in government spending and a fall in unemployment 
B) an increase in inflation and a decrease in output 
C) a decrease in the inflation rate and a rise in the unemployment rate 
D) a decrease in the money supply and a rise in the unemployment rate.

Question 19

The sacrifice ratio is the

Accepted Answer

A) sum of the inflation and unemployment rates. 
B) inflation rate divided by the unemployment rate. 
C) number of percentage points annual output falls for each percentage point reduction in inflation. 
D) number of percentage points unemployment rises for each percentage point reduction in inflation.

Question 20

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

Accepted Answer

A) downward pressures on prices and wages. 
B) downward pressures on prices and upward pressures on wages. 
C) upward pressures on prices and downward pressures on wages. 
D) upward pressures on prices and wages.

Exam 36: The Short-Run Trade-Off Between Inflation and Unemployment

A country is likely to have a higher sacrifice ratio if

In the late 1960s,Milton Friedman and Edmund Phelps argued that

Samuelson and Solow argued that a combination of low unemployment and low inflation

If people eventually adjust their inflation expectations so that in the long run actual and expected inflation are the same,then policymakers

In the Friedman-Phelps analysis,when inflation is less than expected,the unemployment rate is less than the natural rate.

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

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment.

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

If monetary policy moves unemployment below its natural rate,both expected and actual inflation will rise.

In the long run,

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year,the sacrifice ratio is

A shock increases the costs of production.Given the effects of this shock,if the central bank wants to return the unemployment rate towards its previous level it would

Figure 36-1.The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves.On the right-hand diagram,U represents the unemployment rate. -Refer to Figure 36-1.The curve that is depicted on the right-hand graph offers policymakers a "menu" of combinations

Figure 36-8.The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves.On the right-hand diagram,"Inf Rate" means "Inflation Rate." -Refer to Figure 36-8.The shift of the aggregate-supply curve from AS₁ to AS₂

Which of the following leads to a lower level of unemployment in the long run?

If the short-run Phillips curve were stable,which of the following would be unusual?

The sacrifice ratio is the

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

Exam 36: The Short-Run Trade-Off Between Inflation and Unemployment

A country is likely to have a higher sacrifice ratio if

In the late 1960s,Milton Friedman and Edmund Phelps argued that

Samuelson and Solow argued that a combination of low unemployment and low inflation

If people eventually adjust their inflation expectations so that in the long run actual and expected inflation are the same,then policymakers

In the Friedman-Phelps analysis,when inflation is less than expected,the unemployment rate is less than the natural rate.

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

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment.

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

If monetary policy moves unemployment below its natural rate,both expected and actual inflation will rise.

In the long run,

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year,the sacrifice ratio is

A shock increases the costs of production.Given the effects of this shock,if the central bank wants to return the unemployment rate towards its previous level it would

Figure 36-1.The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves.On the right-hand diagram,U represents the unemployment rate. -Refer to Figure 36-1.The curve that is depicted on the right-hand graph offers policymakers a "menu" of combinations

Figure 36-8.The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves.On the right-hand diagram,"Inf Rate" means "Inflation Rate." -Refer to Figure 36-8.The shift of the aggregate-supply curve from AS1 to AS2

Which of the following leads to a lower level of unemployment in the long run?

If the short-run Phillips curve were stable,which of the following would be unusual?

The sacrifice ratio is the

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

Figure 36-8.The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves.On the right-hand diagram,"Inf Rate" means "Inflation Rate." -Refer to Figure 36-8.The shift of the aggregate-supply curve from AS₁ to AS₂