Deck 22: Supply Shocks and Inflation

Question 1

A major factor leading to demand-side inflation is

A) the existence of unions and firms with considerable market power.
B) the presence of considerable slack in the economy.
C) increases in spending when resources are fully employed.
D) significant increases in the prices of important materials (for example, crude oil) in the short run.
E) rapid growth of an economy's potential output.

Answer 1

C

Question 2

Simultaneous high rates of inflation and unemployment are referred to as

A) push-pull inflation.
B) demand-pull inflation.
C) stagflation.
D) reflation.
E) prosperity.

Answer 2

C

Question 3

In part,the wage-price spiral

A) is at the heart of demand-pull inflation.
B) is an example of too much money chasing too few goods.
C) is an outgrowth of a perfectly competitive market structure.
D) occurs when labor productivity rises faster than wage rates.
E) results from the presence of significant market power in the hands of firms and their workers.

Answer 3

E

Question 4

Leftward shifts in the aggregate supply curve are expected to

A) reduce real output and raise unemployment.
B) increase real output but raise the price level.
C) increase the price level unless the money supply is allowed to increase to bring down prices.
D) leave output and employment unchanged when the aggregate demand curve intersects the aggregate supply curve's vertical range.
E) reduce output but leave the price level unchanged if the economy is at full employment.

Question 5

When monetary authorities accommodate or validate supply-side inflation,they

A) increase the money supply sufficiently to prevent significant increases in unemployment.
B) pursue tight money policies to ensure matching increases in interest rates.
C) ensure that aggregate demand shifts to the left.
D) reduce the price level by an amount equal to the rate of inflation.
E) rely on large budget surpluses to offset their open market purchases.

Question 6

Supply-side inflation

A) is caused by rapidly increasing labor productivity.
B) results from an increase in aggregate demand.
C) leads to falling price levels.
D) is a manifestation of the wage-price spiral.
E) can occur only at full-employment levels of real GDP.

Question 7

The process of accommodation by the Fed typically means it is following a(n)________ money policy.

A) tight
B) easy
C) selective
D) fiscal
E) open

Question 8

The shift to the right of the Phillips curve in the 1970s and its leftward shift in the middle to late 1990s was in part caused by

A) the impact of government-imposed incomes policies.
B) the fact that the money supply remained constant despite price level changes over these years.
C) shifts in the aggregate supply curve.
D) changes in the way we measure inflation and unemployment rates.
E) variations in the international value of the dollar.

Question 9

Higher than expected rates of inflation cause the short-run Phillips curve to

A) equal the aggregate demand curve.
B) become horizontal.
C) remain stable.
D) shift further upward and out from the origin.
E) reflect the fact that, in the long run, the actual rate of unemployment remains below the natural rate of unemployment.

Question 10

Significant changes in the price of major raw materials such as oil or agricultural goods are often referred to as

A) price ceilings.
B) supply shocks.
C) menu costs.
D) barometric spirals.
E) externalities.

Question 11

During the mid-1990s,the short-run Phillips curve seems to have shifted downward and closer to the origin,providing evidence that suggests

A) increasing short-run unemployment rates.
B) a rising natural rate of unemployment.
C) lower expected rates of inflation.
D) declining rates of labor-force productivity.
E) a reduction in the size of the labor force.

Question 12

It is frequently difficult to separate supply-side from demand-side inflation because

A) they are ultimately caused by the same forces.
B) resource price increases may be responsible for the initial price level increase, but further price level increases result from the Fed's efforts to reduce the resulting unemployment.
C) in cases where there is too much aggregate spending, the economy has excess capacity and therefore has a horizontal aggregate supply curve.
D) both kinds of inflation lead to a rapidly increasing total real output.
E) the resulting price level effects of each offset one another.

Question 13

Inflationary conditions that emerge because of specific resource shortages or scarcities are called ________ inflations.

A) cost-overrun
B) sedentary-spending
C) supply-side
D) demand-side
E) parity-price

Question 14

The following questions are based on the following graph, which shows two different Phillips curves, labeled (1) and (2):

Phillips curve (2)could shift up to curve (1)as a result of

A) the decreased bargaining power of unions.
B) expectations of a higher rate of inflation.
C) a higher level of training of the labor force.
D) increased labor productivity.
E) decreased government spending.

Question 15

The Phillips curve for the 1970s,compared to that for the 1950s and 1960s

A) revealed a lower (3 percent) natural rate of unemployment.
B) was shifted downward to the left and appeared more nearly horizontal.
C) was a more predictable phenomenon and guide to policy formation.
D) resulted from a rightward shift in aggregate supply.
E) indicated the presence of strong inflationary expectations.

Question 16

Supply-side inflation

A) generally occurs during periods of full employment of both human and capital resources.
B)shifts the aggregate supply curve downward to the right.
E) reflects, in part, the market power of labor unions and large corporations.
D) is caused by large decreases in the money supply.
C) causes the prices of important inputs to fall.

Question 17

A leftward shift in the aggregate supply curve produces

A) demand-side inflation.
B) increases in the price level.
C) falling interest rates.
D) a higher standard of living.
E) a horizontal Phillips curve.

Question 18

The following questions are based on the following graph, which shows two different Phillips curves, labeled (1) and (2):

Phillips curves (1)and (2)are examples of ________ Phillips curves.

A) equilibrium
B) accelerated
C) natural
D) short-run
E) substandard

Question 19

A major factor leading to the supply-side inflation of the middle and late 1970s was the

A) tight money policies carried out by the Fed.
B) presence of considerable slack in the economy.
C) decreases in spending when resources were less than fully employed.
D) significant increases in the prices of important materials (for example, crude oil).
E) the rapid increase in labor productivity in the economy.

Question 20

The Phillips curve illustrates the relationship between

A) the interest rate and the money supply.
B) the interest rate and the level of investment.
C) aggregate demand and aggregate supply.
D) output and income.
E) inflation and unemployment.

Question 21

The basic assertion of those who argue that the long-run Phillips curve is vertical is that

A) both unemployment and price stability can be achieved through proper discretionary monetary and fiscal policies.
B) over the long run, the Phillips curve is useful for making economic policy tradeoffs between inflation and unemployment.
C) inflation is caused by cost-push forces and can be reduced only by wage and price controls.
D) expansionary monetary and fiscal policies improve the rate of unemployment only temporarily because they also change inflationary expectations.
E) the natural rate of unemployment will fall to zero over time.

Question 22

The importance of the vertical long-run Phillips curve hypothesis is its implication that

A) any increase in the rate of inflation caused by monetary and fiscal policies designed to reduce unemployment is temporary.
B) price controls can do no good.
C) monetary and fiscal policies designed to reduce unemployment below its natural rate do so temporarily.
D) to solve the inflation-unemployment problem, labor unions must recognize that their wage gains are eroded by inflation.
E) expansionary monetary or fiscal policy shifts the long-run Phillips curve to the left.

Question 23

If individuals adapt their expectations concerning the rate of inflation,the long-run Phillips curve is

A) horizontal.
B) vertical.
C) downward sloping from left to right.
D) first upward, then downward sloping from left to right.
E) shifting upward and out from the origin.

Question 24

The idea that,in the long run,the rate of unemployment is NOT related to the rate of inflation is based on the concept of the

A) multiplier.
B) division of labor.
C) law of one price.
D) backward-bending supply curve of labor.
E) natural rate of unemployment.

Question 25

The concept of the natural rate of unemployment

A) states that higher inflationary rates are necessary to substantially reduce its value.
B) is credited to A. W. Phillips.
C) reflects, in part, the willingness of workers to remain voluntarily unemployed rather than take unattractive or lower-paying jobs.
D) reflects the fact that people are lazy and will not work unless they have to.
E) denotes workers temporarily unemployed as a result of expansionary monetary and fiscal policies.

Question 26

The trend toward a decline in the rate of inflation since the middle to late 1980s has been generally attributed to

A) higher prices abroad, leading to a reduction in our imports.
B) the growth in manufacturing employment relative to employment in services.
C) an increase in tariffs to keep out foreign goods.
D) the monetary policy pursued by the Fed.
E) expansionary fiscal programs undertaken by Presidents Bush and Clinton.

Question 27

Those who hold that the downward-sloping Phillips curve is a short-run relationship argue that it is futile for government to try to reduce the unemployment rate below

A) zero.
B) its natural rate.
C) the Phillips curve.
D) the levels mandated by the Kennedy-Johnson guidelines.
E) the rate of labor productivity.

Question 28

The term deflation

A) describes what happens when the money supply increases more rapidly than output.
B) is another name for simultaneously high rates of inflation and unemployment.
C) is used to describe a situation in which prices fall and inflation turns negative.
D) indicates a situation where an aggregate supply decrease takes place very rapidly.
E) means double-digit rates of inflation.

Question 29

Wage and price controls and income policies are techniques advocated to

A) shift the Phillips curve to the left.
B) shift the aggregate supply curve to the left.
C) shift the 45-degree line to the left.
D) shift the production possibilities curve to the left.
E) control inflation by increasing the rate of unemployment.

Question 30

The basic argument against wage and price controls is that

A) they can be used only during periods of all-out war.
B) as a solution to inflation, they are popular with economists, not with politicians or the general public.
C) they require labor to take wage reductions before firms can reduce their prices.
D) they are not helpful as a short-run remedy, although they do work effectively over the long run.
E) they necessitate implementing other allocation schemes that often impair economic efficiency.

Question 31

Wage and price controls have been proposed primarily as a means for dealing with

A) severe recessionary conditions.
B) decreases in the price level.
C) income policies.
D) situations resulting from irresponsible decreases in the money supply.
E) supply-side inflation.

Question 32

Which of the following policies would most economists consider the LEAST desirable method to control inflation?

A) a reduction of the rate of growth of the money supply
B) increases in personal income tax rates
C) an imposition of wage and price controls
D) significant reductions in government spending levels
E) a reduction of the size of the government budget deficit

Question 33

The term stagflation refers to

A) periods of falling prices.
B) a period of high unemployment coupled with rising prices.
C) techniques of policy the government can use to promote economic stability.
D) a combination of high rates of employment coupled with rising purchasing power of the currency.
E) periods of rising labor productivity leading to unemployment.

Question 34

If the long-run Phillips curve is vertical,expansionary monetary and fiscal policies that attempt to reduce the unemployment rate below its natural rate

A) lower inflationary expectations.
B) eliminate the wage-price spiral.
C) lead to accelerating rates of inflation.
D) shift the short-run Phillips curve downward to the left.
E) reduce the consumer price index.

Question 35

Higher expected rates of inflation

A) lead to a decline in the money supply.
B) cause unions to settle for more moderate money wage increases.
C) stem from high industrial productivity growth rates.
D) force the money wages of labor downward.
E)shift the short-run Phillips curve upward to the right.

Question 36

If individuals' expectations are formed adaptively

A) short-run unemployment rates will rise at first, then fall.
B) antirecessionary fiscal and monetary policies will not affect the price level.
C) the long-run Phillips curve slopes downward.
D) policy efforts to reduce the unemployment rate below the natural rate have only a temporary impact.
E) the aggregate supply curve is horizontal.

Question 37

Wage and price controls and incomes policies are

A) techniques used to increase aggregate demand without increasing aggregate supply.
B) methods used by government to try to reduce inflation without increasing unemployment.
C) examples of discretionary monetary policies.
D) currently in effect in the U.S. economy.
E) key elements of President Roosevelt's New Deal.

Question 38

According to Friedman and Phelps,the long-run Phillips curve is

A) horizontal.
B) vertical.
C) downward sloping from left to right.
D) first upward, then downward sloping from left to right.
E) shifting upward and out from the origin.

Question 39

Labor's ability to increase nominal wage rates

A) decreases as labor's power and influence increase.
B) increases as government policy focuses on maintaining stable prices.
C) is unaffected by the amount of idle productive capacity.
D) is greatest when the government attempts to reduce the unemployment rate below the natural rate.
E) is greatest when there is perfect competition in labor markets.

Question 40

Economists Milton Friedman and Edmund Phelps argue that there is a natural rate of unemployment determined by

A) a downward-sloping Phillips curve.
B) the C + I + G line.
C) the rate of inflation.
D) the length of time workers search for new jobs.
E) government proclamation.

Question 41

If the Fed accommodates a leftward shift in the aggregate supply curve

A) real output will fall.
B) the price level will rise considerably.
C) the aggregate demand curve will shift downward to the left.
D) the Phillips curve will shift downward to the left.
E) inflationary pressures will rapidly die out.

Question 42

As a result of the monetary policy just undertaken,the price level

A) declines to ₀P₄.
B) declines to ₀P₁.
C) declines to ₀P₀.
D) rises to ₀P₃.
E) remains at ₀P₀.

Question 43

A supply-side inflation that the Fed accommodates is best illustrated by a

A) leftward shift in the aggregate demand curve.
B) rightward shift in the aggregate supply curve.
C) leftward shift in the aggregate demand curve with a rightward shift in the aggregate supply curve.
D) leftward shift in both the aggregate demand and aggregate supply curves.
E) leftward shift in the aggregate supply curve and a rightward shift in the aggregate demand curve.

Question 44

The Kennedy-Johnson guidelines broke down in the late 1960s because of

A) strong demand-side inflation.
B) the symptoms of deflation.
C) increases in aggregate supply.
D) price decreases by big firms.
E) labor union wage restraints.

Question 45

Which of the following strategies did the government generally call on to enforce its incomes policies in the 1960s?

A) government contracts to those who cooperated
B) tax penalties for noncompliance
C) fines
D) criminal charges
E) antitrust action by the Department of Justice

Question 46

The Kennedy-Johnson guidelines specified that the rate of increase of wage rates,including fringe benefits,for a particular industry should equal the

A) rate of productivity increase in that industry.
B) rate of increase in the general price level.
C) trend rate of overall productivity increase.
D) rate of wage increase in the countries that are our major trading partners.
E) increase in steel and auto industries' wages.

Question 47

Which of the following best describes the relationship between unemployment and inflation as we understand it today?

A) In the short run, one tends to go up as the other goes down; in the long run, there may be little relationship.
B) In the short run, there is little relationship; in the long run, one tends to go up as the other falls.
C) One tends to go up as the other falls in both the short and long runs.
D) There is no discernible relationship in either the short or the long run.
E) Unemployment and inflation tend to rise and fall together in both the short and the long runs.

Question 48

If overall labor productivity is increasing at an average rate of 3 percent per year but by only
1 percent per year in the shoe manufacturing industry,then under the Kennedy-Johnson guidelines,wages of shoe workers should increase by ________ percent per year; prices of
Shoes should ________.

A) 1; not change
B) 1; increase by 1 percent per year
C) 3; increase by 2 percent per year
D) 3; not change
E) 3; decrease by 2 percent per year

Question 49

Under these conditions,unemployment will

A) rise as real output declines.
B) fall as real output rises.
C) remain unchanged as real output declines.
D) fall as price levels rise.
E) rise as price levels decline.

Question 50

As a result of the famous 1962 confrontation between President Kennedy and the steel industry,U.S.Steel ultimately

A) won the right to set prices without government interference.
B) lost a major share of its market to other industry rivals.
C) became the new industry price leader by setting voluntary limits on annual price increases.
D) had to rescind price increases when other steel producers failed to follow its lead.
E) was divided into three independent steel companies.

Question 51

Wage and price controls

A) are an effective means to control strong cost-push inflation over the long haul.
B) are an easy and inexpensive means to contain inflation.
C) typically are enthusiastically supported by labor unions.
D) ultimately break down if monetary and fiscal policies are overly expansive.
E) are least desirable during a period of all-out war or other national emergency.

Question 52

The famous confrontation between President Kennedy and the steel industry in 1962 illustrates the

A) general inability of government to control big business effectively.
B) power of moral suasion without the need to use economic incentives.
C) power of presidential pressure in enforcing wage and price guidelines.
D) tendency of major industries to act in the public interest regardless of guidelines.
E) importance of using the antitrust laws to reduce monopoly power.

Question 53

An incomes policy typically

A) requires that unions forgo wage increases.
B) gives particular firms and industries guidelines for decision making on wages and prices.
C) establishes worker retraining programs.
D) legislates penalties for compliance.
E) redistributes incomes in favor of the poor.

Question 54

The following questions are based on the following diagram, in which existing aggregate supply and demand curves are AS₀ and AD₀, respectively:

Significant increases in strategic input prices will

A) shift the aggregate demand curve to AD₁.
B) leave the aggregate demand and supply unchanged.
C) shift the aggregate supply curve to AS₂.
D) shift the aggregate supply curve to AS₁.
E) shift aggregate demand to AD₁ and aggregate supply to AS₂.

Question 55

Monetary authorities might attempt to minimize the impact of the strategic input price increases on unemployment by

A) doing nothing because unemployment is unchanged.
B) increasing the money supply to shift aggregate demand to AD₁.
C) increasing the money supply to shift aggregate supply to AS₂.
D) decreasing the money supply to shift aggregate supply to AS₁.
E) decreasing the money supply to shift aggregate demand back to AD₀.

Question 56

Incomes policies are another name for

A) the Employment Act of 1946.
B) functional finance.
C) welfare programs.
D) wage and price guidelines and/or controls.
E) a full-employment budget.

Question 57

Which of the following best describes the overall economic impact of the food and energy supply shocks in the 1970s?

A) Many Americans began spending more in an effort to acquire needed goods before the shortages grew worse.
B) The economy experienced both rising price levels and increased unemployment.
C) The prices of food and oil products increased, but there was little impact on other sectors of the economy.
D) Because the U.S. economy is self-sufficient, these international supply shocks had little impact.
E) Many consumers responded by boycotting oil-related and food products, driving down the prices of these goods.

Question 58

As a result of these strategic input price increases,the price level

A) rises to ₀P₂ and real output increases to ₀Q₂.
B) increases to ₀P₃ and real output remains unchanged.
C) remains unchanged and real output increases to ₀Q₃.
D) remains unchanged and real output remains unchanged.
E) rises to ₀P₁ and real output declines to ₀Q₁.

Question 59

The initial success of the Kennedy-Johnson wage and price guidelines was diminished considerably during the late 1960s mainly because

A) labor markets tightened in response to the Vietnam buildup.
B) the Council of Economic Advisers was opposed to them.
C) the guidelines had no real administrative backing.
D) they had fulfilled their purpose and were no longer needed.
E) they were favored only by labor unions.

Question 60

A general criticism of the Kennedy-Johnson guidelines was that they

A) required price reductions equal to the rate of increase in overall productivity.
B) permitted no increases in wages or prices regardless of the rate of inflation.
C) resulted in inefficiency, waste, and a loss of economic freedom over time.
D) applied solely to the steel industry, rather than to the economy at large.
E) were long-run remedies and thus of no help during emergencies.

Question 61

The New Economy of the 1990s was characterized by

A)productivity increases and the globalization of business, which shifted the aggregate supply curve to the right
B) unemployment rates that rose rapidly because businesses outsourced production to low-wage countries
C) inflationary rates that rose steadily to more than 4.5 percent per year because of the Fed's easy-money policies.
D) large declines in aggregate demand that led to concerns by policy makers that deflation was becoming a major threat.
E) increases in budget deficits that were used to finance large government expenditures on research and development.

Question 62

The stagflation of the 1970s and the New Economy of the 1990s were similar in that both

A) resulted in periods of low unemployment and stable prices.
B) were created by high levels of government spending and large budget deficits.
C) demonstrated the inability of a market economy to provide adequately for individuals' economic well-being.
D) were relatively unaffected by international economic forces and events.
E) were products of significant shifts in the aggregate supply curve relative to shifts in the aggregate demand curve.

Question 63

The main reason the government relied on a restrictive monetary policy to fight inflation during the late 1970s was that

A) such a policy was strongly urged during the 1974 economic summit conference called by President Ford.
B) such a policy is the only proven method for fighting inflation and unemployment at the same time.
C) unemployment was then viewed as a more serious problem than inflation, and such a policy could boost employment.
D) most observers during that time felt that inflation was due to excessive demand, not shortages.
E) the resulting increase in interest rates would stimulate investment and expanded output.

Question 64

According to economic analyst Richard Gill,the reason the government policy makers were so ineffective in combating stagflation in the 1970s was that they

A) focused solely on supply-side forces and ignored significant changes in aggregate demand.
B) relied too heavily on changes in taxes rather than changes in the money supply.
C) shifted back and forth between fighting inflation and fighting unemployment, using demand-oriented policies.
D) did not have accurate data on the actual rate of inflation and unemployment.
E) relied too heavily on the ability of our economy to regulate itself without government intervention.