Question 1

Wage and price controls

Accepted Answer

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. 
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 2

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

Accepted Answer

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. 
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 3

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

Accepted Answer

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. 
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 4

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

Accepted Answer

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. 
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 5

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

Accepted Answer

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

Question 6

The term deflation

Accepted Answer

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. 
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 7

Higher expected rates of inflation

Accepted Answer

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. 
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 8

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

Accepted Answer

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. 
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 9

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

Accepted Answer

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. 
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 10

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

Accepted Answer

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. 
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 11

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

Accepted Answer

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. 
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 12

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

Accepted Answer

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. 
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 13

An incomes policy typically

Accepted Answer

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. 
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 14

Leftward shifts in the aggregate supply curve are expected to

Accepted Answer

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. 
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 15

Wage and price controls and income policies are techniques advocated to

Accepted Answer

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. 
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 16

Labor's ability to increase nominal wage rates

Accepted Answer

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. 
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 17

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

Accepted Answer

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. 
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 18

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

Accepted Answer

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. 
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.

Question 19

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

Accepted Answer

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. 
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 20

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

Accepted Answer

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. 
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.

Exam 22: Supply Shocks and Inflation

Wage and price controls

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

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

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

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

The term deflation

Higher expected rates of inflation

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

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

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

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

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

An incomes policy typically

Leftward shifts in the aggregate supply curve are expected to

Wage and price controls and income policies are techniques advocated to

Labor's ability to increase nominal wage rates

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

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

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

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

What is Economics

Markets and Prices

The Business Firm: Organization,motivation,and Optimal Input Decisions

Getting Behind the Demand and Supply Curves

Market Demand and Price Elasticity

Economic Efficiency,market Supply,and Perfect Competition

Monopoly and Its Regulation

Monopolistic Competition,oligopoly,and Antitrust Policy

Pollution and the Environment

The Supply and Demand for Labor

Interest,rent,and Profit

Poverty,income Inequality,and Discrimination

Economic Growth

Public Goods and the Role of the Government

National Income and Product

Business Fluctuations and Unemployment

The Determination of National Output and the Keynesian Multiplier

Fiscal Policy and National Output

Inflation

Money and the Banking System

The Federal Reserve and Monetary Policy

Productivity,growth,and Technology Policy

Surpluses,deficits,public Debt,and the Federal Budget

Monetary Policy,interest Rates,and Economic Activity

Controversies Over Stabilization Policy

International Trade

Exchange Rates and the Balance of Payments

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