Question 1

An increase in aggregate demand is most likely to cause an increase in the price level when the economy is

Accepted Answer

A)  operating near full employment. 
B)  on the horizontal part of the aggregate supply curve. 
C)  operating with high unemployment. 
D)  operating with substantial excess capacity.

Question 2

All points on the long run Phillips curve that are sustainable in the long run due to economy's self correcting mechanism correspond to

Accepted Answer

A)  the mature rate of unemployment. 
B)  the natural rate of unemployment. 
C)  the seasonal rate of unemployment. 
D)  the cyclical rate of unemployment.

Question 3

Which of the following observations concerning the Phillips curve is not true?

Accepted Answer

A)  They are normally upward-sloping. 
B)  They are more commonly constructed for price inflation. 
C)  They depict the inverse relation between wage inflation and unemployment. 
D)  They depict the rate of unemployment on the horizontal axis.

Question 4

The main reason why the economy's aggregate supply curve slopes upward is that

Accepted Answer

A)  as the price level rises,businesses incur additional costs. 
B)  businesses typically purchase labor and other inputs under long-term contracts that fix the cost of the input in money terms. 
C)  as the price level rises,workers have higher real wages to spend for additional consumer goods. 
D)  All of the above are correct.

Question 5

Figure 17-4 
-Which of the following led to the collapse of the Phillips Curve?

Accepted Answer

A)  Rightward shift in the demand for labor curve 
B)  Leftward shift of the Phillips curve 
C)  Leftward shift of the aggregate supply curve 
D)  Rightward shift of the aggregate demand curve.

Question 6

If fluctuations in economic activity come from the supply side,higher inflation is associated with

Accepted Answer

A)  lower interest rates. 
B)  structural deficits. 
C)  higher rates of unemployment. 
D)  lower rates of unemployment.

Question 7

Rational expectations are forecasts

Accepted Answer

A)  that,while not necessarily correct,are the best that can be made given the available data. 
B)  that are technically correct. 
C)  that accurately predict the short-term trade-off between inflation and unemployment. 
D)  made by economists using the most sophisticated econometric models.

Question 8

Figure 17-1 
-Which of the following is true about the economy depicted in Figure 17-1?

Accepted Answer

A)  Tax incentives are being used to stimulate aggregate supply. 
B)  Policy makers believe the costs of unemployment are higher than the costs of inflation. 
C)  Contractionary monetary policy is being enacted to fight inflation. 
D)  Prices are rising but real GDP is falling.

Question 9

When inflation comes from the supply side,inflation and unemployment are positively correlated.Does this mean that monetary and fiscal policy makers can escape the trade-off between inflation and unemployment?

Accepted Answer

The answer of When inflation comes from the supply side,inflation...

Question 10

What will tend to happen to wages if workers and employers foresee inflation?

Accepted Answer

A)  Both parties will seek to reduce nominal wages and therefore keep real wages the same. 
B)  Nominal wages will remain constant but real wages will increase to avoid the effects of inflation. 
C)  Inflation erodes purchasing power of workers,and real wages are unchanged. 
D)  Nominal wages will increase by an amount that keeps real wages constant.

Question 11

A scatter diagram of the position of the U.S.economy from 1972 through 2007 with the price level on the vertical axis and real GDP on the horizontal axis would show a movement generally toward the

Accepted Answer

A)  northwest. 
B)  northeast. 
C)  southwest. 
D)  southeast.

Question 12

Fighting inflation by slowing the growth of aggregate demand is

Accepted Answer

A)  endorsed by most politicians. 
B)  a convenient way to reduce inflation. 
C)  unpopular with politicians. 
D)  always easily accepted by firms and workers.

Question 13

In the face of the 2007-2009 recession,the President,Congress,and the Fed

Accepted Answer

A)  decided to rely on the self-correcting mechanism of the economy to eliminate inflation. 
B)  decided to rely on the self-correcting mechanism of the economy to reduce unemployment. 
C)  pursued an active policy to balance the budget and fight inflation. 
D)  pursued an active policy to expand aggregate demand.

Question 14

The economy's self-correcting mechanism

Accepted Answer

A)  tends to push unemployment toward a specific point called the natural rate of unemployment. 
B)  works better at correcting inflationary gaps than recessionary gaps. 
C)  cannot work if the Phillips curve is vertical. 
D)  ensures that the economy will not have to endure a long period of high unemployment.

Question 15

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate demand increases,then data would show the

Accepted Answer

A)  worst recession occurs when output expands most rapidly. 
B)  slowest inflation occurs when output expands most rapidly. 
C)  slowest economic growth occurs when output grows most rapidly. 
D)  most rapid inflation occurs when output expands most rapidly.

Question 16

If business fluctuations are from demand-side forces,

Accepted Answer

A)  monetary and fiscal policy will move inversely. 
B)  interest rates and budget deficits will move inversely. 
C)  unemployment and inflation will move inversely. 
D)  unemployment and budget deficits will move inversely.

Question 17

If aggregate demand grows faster than aggregate supply,the equilibrium price level will rise.

Accepted Answer

A) True 
 B)False

Question 18

Figure 17-6 
-If Figure 17-6 (a)illustrates the elimination of a recessionary gap,then the economy should move to what point on the curves shown in Figure 17-6 (b)?

Accepted Answer

A)  from e to r 
B)  from g to j 
C)  from r to j 
D)  from r to m

Question 19

In what way do policy makers have to face a trade-off between inflation and unemployment?

Accepted Answer

A)  The cost of reducing inflation by restrictive fiscal and monetary policies is a temporary increase in unemployment. 
B)  The cost of reducing inflation by restrictive fiscal and monetary policies is a permanent increase in unemployment. 
C)  The cost of reducing unemployment by expansionary fiscal and monetary policies is virtually nonexistent. 
D)  The cost of reducing unemployment by expansionary fiscal and monetary policies involves higher inflation during recessions.

Question 20

If expectations are "rational," can the Fed control unemployment?

Accepted Answer

A)  Yes,provided it announces policy in advance. 
B)  Yes,if it affects the aggregate demand curve. 
C)  No,because aggregate supply is vertical even in the short run. 
D)  No,because only fiscal policy can affect unemployment.

Exam 17: The Trade Off Between Inflation and Unemployment