Question 1

Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is

Accepted Answer

A)   5.
B)   2.
C)   12.
D)   None of the above is correct.E) C) and D)
F) B) and C)

Question 2

If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Accepted Answer

A)   4 percent of annual output.
B)   8 percent of annual output.
C)   12 percent of annual output.
D)   16 percent of annual output.E) C) and D)
F) All of the above

Question 3

An increase in the price of oil shifts the

Accepted Answer

A)   short-run Phillips curve right and the unemployment rate rises.
B)   short-run Phillips curve right and the unemployment rate falls.
C)   short-run Phillips curve left and the unemployment rate rises.
D)   short-run Phillips curve left and the unemployment rate falls.E) C) and D)
F) B) and D)

Question 4

If inflation expectations rise, the short-run Phillips curve shifts

Accepted Answer

A)   right, so that at any unemployment rate inflation is higher in the short run than before.
B)   left, so that at any unemployment rate inflation is higher in the short run the before.
C)   right, so that at any unemployment rate inflation is lower in the short run than before.
D)   left, so that at any unemployment rate inflation is lower in the short run than before.E) All of the above
F) B) and C)

Question 5

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? Use sticky-wage theory to explain your answer.

Accepted Answer

If unemployment is above its natural rat...

Question 6

Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short- run consequence of this contraction?

Accepted Answer

A)   The inflation rate decreases.
B)   The level of output decreases.
C)   The unemployment rate increases.
D)   All of the above are correct.E) A) and D)
F) None of the above

Question 7

In the short run, policy that changes aggregate demand changes

Accepted Answer

A)   both unemployment and the price level.
B)   neither unemployment nor the price level.
C)   only unemployment.
D)   only the price level.E) A) and D)
F) None of the above

Question 8

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as

Accepted Answer

A)   0.
B)   1.
C)   4.
D)   5.E) A) and C)
F) B) and C)

Question 9

The classical notion of monetary neutrality is consistent both with a vertical long-run aggregate-supply curve and with a vertical long-run Phillips curve.

Accepted Answer

A) True 
 B)False

Question 10

Disinflation is a reduction in

Accepted Answer

A)   the price level.
B)   the inflation rate.
C)   the consumer price index.
D)   All of the above are correct.E) B) and D)
F) None of the above

Question 11

The large increase in oil prices in the 1970s was caused primarily by an)

Accepted Answer

A)   increase in demand for oil.
B)   decrease in demand for oil.
C)   decrease in the supply of oil.
D)   increase in the supply of oil.E) C) and D)
F) A) and B)

Question 12

In the nineteenth century, some countries were on a gold standard so that on average the money supply growth rate was close to zero and expected inflation was more or less constant. For these countries during this time period, we find that increases in actual inflation were generally associated with falling unemployment. These findings

Accepted Answer

A)   are consistent with Friedman and Phelps's theories, because they argued that when inflation was higher than expected, unemployment would fall.
B)   are consistent with Friedman and Phelps's theories, because they argued that when prices rose unemployment would fall whether actual inflation was higher than expected or not.
C)   are inconsistent with Friedman and Phelps's theories, because they argued that higher inflation would increase unemployment.
D)   are inconsistent with Friedman and Phelps's theories, because they argued that inflation and unemployment are unrelated.E) All of the above
F) A) and C)

Question 13

If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should

Accepted Answer

A)   increase the money supply growth rate which also moves unemployment closer to its natural rate.
B)   increase the money supply growth rate, but this moves unemployment further from its natural rate.
C)   decrease the money supply growth rate which also moves unemployment closer to its natural rate.
D)   decrease the money supply growth rate, but this moves unemployment further from its natural rate.E) A) and B)
F) A) and C)

Question 14

If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

Accepted Answer

A)   higher unemployment and lower output.
B)   higher unemployment and higher output.
C)   lower unemployment and lower output.
D)   lower unemployment and higher output.E) A) and D)
F) C) and D)

Question 15

Neither monetary policy nor any government policy can change the natural rate of unemployment.

Accepted Answer

A) True 
 B)False

Question 16

In the long run, an increase in the money supply growth rate

Accepted Answer

A)   shifts both the long-run and the short-run Phillips curves right.
B)   shifts the long-run Phillips curve left and the short-run Phillips curve right.
C)   shifts the long-run Phillips curve right and the short-run Phillips curve left.
D)   None of the above is correct.E) B) and C)
F) A) and D)

Question 17

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.E) A) and D)
F) A) and C)

Question 18

An adverse supply shock will shift short-run aggregate supply

Accepted Answer

A)   right, making prices rise.
B)   left, making prices rise.
C)   right, making prices fall.
D)   left, making prices fall.E) All of the above
F) A) and B)

Question 19

Samuelson and Solow believed that the Phillips curve

Accepted Answer

A)   implied that low unemployment was associated with low inflation.
B)   indicated that the aggregate supply and aggregate demand model was incorrect.
C)   offered policymakers a menu of possible economic outcomes from which to choose.
D)   All of the above are correct.E) B) and C)
F) B) and D)

Question 20

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

Accepted Answer

A) True 
 B)False

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

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? Use sticky-wage theory to explain your answer.

Correct Answer
verified
If unemployment is above its natural rat...
View Answer

In the short run, policy that changes aggregate demand changes

Correct Answer
verified

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as

Correct Answer
verified

An increase in the price of oil shifts the

Correct Answer
verified

If inflation expectations rise, the short-run Phillips curve shifts

Correct Answer
verified

If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Correct Answer
verified

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

Correct Answer
verified

Disinflation is a reduction in

Correct Answer
verified

Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short- run consequence of this contraction?

Correct Answer
verified

Correct Answer
verified

If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should

Correct Answer
verified

The large increase in oil prices in the 1970s was caused primarily by an)

Correct Answer
verified

Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is

Correct Answer
verified

The classical notion of monetary neutrality is consistent both with a vertical long-run aggregate-supply curve and with a vertical long-run Phillips curve.

Correct Answer
verified

Neither monetary policy nor any government policy can change the natural rate of unemployment.

Correct Answer
verified

In the long run, an increase in the money supply growth rate

Correct Answer
verified

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

Correct Answer
verified

An adverse supply shock will shift short-run aggregate supply

Correct Answer
verified

Samuelson and Solow believed that the Phillips curve

Correct Answer
verified

If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

Correct Answer
verified

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

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? Use sticky-wage theory to explain your answer.

Correct AnswerverifiedIf unemployment is above its natural rat...View AnswerShow Answer

In the short run, policy that changes aggregate demand changes

Correct AnswerverifiedShow Answer

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as

Correct AnswerverifiedShow Answer

An increase in the price of oil shifts the

Correct AnswerverifiedShow Answer

If inflation expectations rise, the short-run Phillips curve shifts

Correct AnswerverifiedShow Answer

If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Disinflation is a reduction in

Correct AnswerverifiedShow Answer

Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short- run consequence of this contraction?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should

Correct AnswerverifiedShow Answer

The large increase in oil prices in the 1970s was caused primarily by an)

Correct AnswerverifiedShow Answer

Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is

Correct AnswerverifiedShow Answer

The classical notion of monetary neutrality is consistent both with a vertical long-run aggregate-supply curve and with a vertical long-run Phillips curve.

Correct AnswerverifiedShow Answer

Neither monetary policy nor any government policy can change the natural rate of unemployment.

Correct AnswerverifiedShow Answer

In the long run, an increase in the money supply growth rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An adverse supply shock will shift short-run aggregate supply

Correct AnswerverifiedShow Answer

Samuelson and Solow believed that the Phillips curve

Correct AnswerverifiedShow Answer

If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

Correct AnswerverifiedShow Answer

Correct Answer
verified
If unemployment is above its natural rat...
View Answer

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