Question 1

If policymakers expand aggregate demand, what happens to inflation and unemployment in the long run?

Accepted Answer

A)  Inflation will be higher and unemployment will be lower. 
B)  Inflation will be higher and unemployment will be unchanged. 
C)  Inflation and unemployment will be unchanged. 
D)  Both inflation and unemployment will be higher.

Question 2

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

Accepted Answer

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

Question 3

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists?

Accepted Answer

The answer of Suppose that the economy is at an...

Question 4

According to Friedman and Phelps, no matter what a central bank does to the money supply, what will happen in the long run?

Accepted Answer

A)  The economy will have a zero inflation rate. 
B)  The unemployment rate will tend toward the natural rate of unemployment. 
C)  The inflation rate will tend to the natural rate of inflation. 
D)  The economy will have a zero unemployment rate.

Question 5

Which equation summarize the analysis of Friedman and Phelps (where a is a positive number)?

Accepted Answer

A)  unemployment rate = natural rate of unemployment - a(actual inflation - expected inflation) 
B)  unemployment rate = natural rate of unemployment - a(expected inflation - actual inflation) 
C)  unemployment rate = expected rate of inflation - a(actual inflation - expected inflation) 
D)  unemployment rate = actual rate of inflation - a(actual unemployment - expected unemployment)

Question 6

If inflation expectations rise, how do the short-run Phillips curve and unemployment change?

Accepted Answer

A)  The short-run Phillips curve shifts right, so that at any inflation rate unemployment is higher. 
B)  The short-run Phillips curve shifts left, so that at any inflation rate unemployment is higher. 
C)  The short-run Phillips curve shifts right, so that at any inflation rate unemployment is lower. 
D)  The short-run Phillips curve shifts left, so that at any inflation rate unemployment is lower.

Question 7

Which of the following would shift aggregate supply to the right?

Accepted Answer

A)  increasing commodity prices 
B)  an increase in money supply 
C)  an increase in wages 
D)  an increase in the economy's capital stock

Question 8

Figure 17-2 
-Refer to Figure 17-2. 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)  a

Question 9

Suppose the Bank of Canada reduces inflation 3 percentage points, and this makes output fall 12 percentage points and unemployment rises 4 percentage points. What is the sacrifice ratio?

Accepted Answer

A)  1/4 
B)  3 
C)  4 
D)  12

Question 10

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 11

Figure 17-4 
-Refer to Figure 17-4. What is the natural rate of unemployment?

Accepted Answer

A)  0 percent 
B)  2 percent 
C)  5 percent 
D)  8 percent

Question 12

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 13

In the long run, what are the effects of a decrease in the rate of growth of the money supply?

Accepted Answer

A)  It will increase inflation and shift the short-run Phillips curve right. 
B)  It will increase inflation and shift the short-run Phillips curve left. 
C)  It will decrease inflation and shift the short-run Philips curve right. 
D)  It will decrease inflation and shift the short-run Phillips curve left.

Question 14

In the long run, people come to expect whatever inflation rate the Bank of Canada chooses to produce, so unemployment returns to its natural rate.

Accepted Answer

A) True 
 B)False

Question 15

What would NOT be associated with a favourable supply shock?

Accepted Answer

A)  short-run Phillips curve shifts right 
B)  unemployment rises 
C)  price level falls 
D)  output falls

Question 16

How will an adverse supply shock shift the short-run Phillips curve, and how will it change unemployment?

Accepted Answer

A)  It will shift the short-run Phillips curve right and raise unemployment. 
B)  It will shift the short-run Phillips curve right and lower unemployment. 
C)  It will shift the short-run Phillips curve left and raise unemployment. 
D)  It will shift the short-run Phillips curve left and lower unemployment.

Question 17

How does the short-run Phillips curve model reflect an increase in the expected inflation?

Accepted Answer

A)  as a downward shift in the short-run Phillips curve 
B)  as an upward shift in the short-run Phillips curve 
C)  as a downward movement along the short-run Phillips curve 
D)  as an upward movement along the short-run Phillips curve

Question 18

Suppose a central bank reduced inflation by 4 percentage points and that made output fall by 4 percentage points for five years, and it made the unemployment rate rise from 3 percent to 7 percent for three years. What is the sacrifice ratio?

Accepted Answer

A)  1 
B)  3 
C)  4 
D)  5

Question 19

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

Question 20

Figure 17-4 
-Refer to Figure 17-4. If the economy is at point c and the Bank of Canada pursues an expansionary monetary policy, then the economy will move to which point in the short run?

Accepted Answer

A)  point b 
B)  point c 
C)  point d 
D)  point h

Exam 17: The Short-Run Tradeoff Between Inflation and Unemployment