Question 1

A central bank pledges to reduce the inflation rate from 20% to 5%. People reduce their inflation expectations to 10%, but the central bank only reduces inflation to 15%. What happens to the unemployment rate?

Accepted Answer

The answer of A central bank pledges to reduce the...

Question 2

Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.

Accepted Answer

If people believe that the government re...

Question 3

In the United States during the 1970s, expected inflation

Accepted Answer

A)   rose substantially.
B)   rose slightly.
C)   fell slightly.
D)   fell substantially.E) None of the above
F) C) and D)

Question 4

One determinant of the long-run average unemployment rate is the

Accepted Answer

A)   market power of unions, while the inflation rate depends primarily upon government spending.
B)   minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
C)   rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions.
D)   existence of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive.E) B) and C)
F) All of the above

Question 5

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment

Accepted Answer

A)   existed in the long run and the short run.
B)   existed in the long run but not the short run.
C)   existed in the short run but not the long run.
D)   did not exist.E) None of the above
F) A) and B)

Question 6

In 1980, the U.S. misery index was

Accepted Answer

A)   much higher than average.
B)   slightly higher than average.
C)   about average.
D)   below average.E) None of the above
F) B) and C)

Question 7

In 1980, the U.S. economy had an inflation rate of

Accepted Answer

A)   about 1 percent and an unemployment rate of about 7 percent.
B)   less than 4 percent and an unemployment rate of less than 6 percent.
C)   less than 7 percent and an unemployment rate of about 9 percent.
D)   more than 9 percent and an unemployment rate of about 7 percent.E) A) and B)
F) All of the above

Question 8

A favorable supply shock will shift short-run aggregate supply

Accepted Answer

A)   left, making output rise.
B)   left, making output fall.
C)   right, making output rise.
D)   right, making output fall.E) C) and D)
F) None of the above

Question 9

Which of the following would cause the price level to rise and output to fall in the short run?

Accepted Answer

A)   an increase in the money supply
B)   a decrease in the money supply
C)   an adverse supply shock
D)   a favorable supply shockE) B) and C)
F) A) and D)

Question 10

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

Accepted Answer

A)   2 percent of annual output.
B)   6 percent of annual output.
C)   8 percent of annual output.
D)   11 percent of annual output.E) A) and B)
F) C) and D)

Question 11

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 C)
F) C) and D)

Question 12

Which of the following is an example of an adverse supply shock?

Accepted Answer

A)   a decrease in the money supply
B)   a tax cut
C)   a worldwide drought
D)   decreased government spendingE) All of the above
F) B) and C)

Question 13

Suppose the price level is 115.00 at the end of 2020, 112.02 at the end of 2021, and 109.08 at the end of 2022. Can we accurately describe the period 2021-2022 as a period of disinflation?

Accepted Answer

No. Since the price level is f...

Question 14

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

A)   could be high because it was rational for people not to immediately change their expectations.
B)   could be high because people might adjust their expectations quickly if they found anti-inflation policy credible.
C)   could be low because it was rational for people not to immediately change their expectations.
D)   could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.E) A) and B)
F) A) and C)

Question 15

Any policy change that reduced the natural rate of unemployment would

Accepted Answer

A)   shift the long-run Phillips curve to the left.
B)   shift the long-run aggregate-supply curve to the right.
C)   improve the functioning of the labor market.
D)   All of the above are correct.E) None of the above
F) B) and C)

Question 16

The short-run Phillips curve intersects the long-run Phillips curve where

Accepted Answer

A)   the actual rate of inflation equals the expected rate of inflation.
B)   the actual rate of unemployment equals the natural rate of unemployment.
C)   Both A and B are correct.
D)   None of the above is correct.E) B) and C)
F) C) and D)

Question 17

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 18

The natural rate of unemployment

Accepted Answer

A)   is constant over time.
B)   varies over time, but can't be changed by the government.
C)   is the unemployment rate that the economy tends to move to in the long run.
D)   depends on the rate at which the Fed increases the money supply.E) A) and B)
F) None of the above

Question 19

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in

Accepted Answer

A)   the long run and the short run.
B)   the long run but not the short run.
C)   the short run but not the long run.
D)   neither the short run nor the long run.E) A) and D)
F) A) and C)

Question 20

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

Accepted Answer

It returns...

Exam 22: The Short-Run Trade-Off 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

A central bank pledges to reduce the inflation rate from 20% to 5%. People reduce their inflation expectations to 10%, but the central bank only reduces inflation to 15%. What happens to the unemployment rate?

Correct Answer
verified

Correct Answer
verified
If people believe that the government re...
View Answer

One determinant of the long-run average unemployment rate is the

Correct Answer
verified

The short-run Phillips curve intersects the long-run Phillips curve where

Correct Answer
verified

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

Correct Answer
verified

In the United States during the 1970s, expected inflation

Correct Answer
verified

The natural rate of unemployment

Correct Answer
verified

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in

Correct Answer
verified

Which of the following would cause the price level to rise and output to fall in the short run?

Correct Answer
verified

In 1980, the U.S. economy had an inflation rate of

Correct Answer
verified

In 1980, the U.S. misery index was

Correct Answer
verified

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment

Correct Answer
verified

A favorable supply shock will shift short-run aggregate supply

Correct Answer
verified

Any policy change that reduced the natural rate of unemployment would

Correct Answer
verified

Suppose the price level is 115.00 at the end of 2020, 112.02 at the end of 2021, and 109.08 at the end of 2022. Can we accurately describe the period 2021-2022 as a period of disinflation?

Correct Answer
verified
No. Since the price level is f...
View Answer

Which of the following is an example of an adverse supply shock?

Correct Answer
verified

In the short run, policy that changes aggregate demand changes

Correct Answer
verified

Proponents of rational expectations argued that the sacrifice ratio

Correct Answer
verified

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

Correct Answer
verified
It returns...
View Answer

Exam 22: The Short-Run Trade-Off 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

A central bank pledges to reduce the inflation rate from 20% to 5%. People reduce their inflation expectations to 10%, but the central bank only reduces inflation to 15%. What happens to the unemployment rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedIf people believe that the government re...View AnswerShow Answer

One determinant of the long-run average unemployment rate is the

Correct AnswerverifiedShow Answer

The short-run Phillips curve intersects the long-run Phillips curve where

Correct AnswerverifiedShow Answer

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

Correct AnswerverifiedShow Answer

In the United States during the 1970s, expected inflation

Correct AnswerverifiedShow Answer

The natural rate of unemployment

Correct AnswerverifiedShow Answer

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in

Correct AnswerverifiedShow Answer

Which of the following would cause the price level to rise and output to fall in the short run?

Correct AnswerverifiedShow Answer

In 1980, the U.S. economy had an inflation rate of

Correct AnswerverifiedShow Answer

In 1980, the U.S. misery index was

Correct AnswerverifiedShow Answer

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment

Correct AnswerverifiedShow Answer

A favorable supply shock will shift short-run aggregate supply

Correct AnswerverifiedShow Answer

Any policy change that reduced the natural rate of unemployment would

Correct AnswerverifiedShow Answer

Suppose the price level is 115.00 at the end of 2020, 112.02 at the end of 2021, and 109.08 at the end of 2022. Can we accurately describe the period 2021-2022 as a period of disinflation?

Correct AnswerverifiedNo. Since the price level is f...View AnswerShow Answer

Which of the following is an example of an adverse supply shock?

Correct AnswerverifiedShow Answer

In the short run, policy that changes aggregate demand changes

Correct AnswerverifiedShow Answer

Proponents of rational expectations argued that the sacrifice ratio

Correct AnswerverifiedShow Answer

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

Correct AnswerverifiedIt returns...View AnswerShow Answer

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

Correct Answer
verified

Correct Answer
verified
If people believe that the government re...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
No. Since the price level is f...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
It returns...
View Answer