Question 1

Explain the connection between the vertical long run aggregate supply curve and the vertical long run Phillips curve.

Accepted Answer

Both reflect the classical dichotomy.The...

Question 2

Some countries have had relatively high inflation and relatively high unemployment for long periods of time.Is this consistent with the Phillips curve? Defend your answer.

Accepted Answer

They are consistent with the long run Ph...

Question 3

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Accepted Answer

A) True 
 B)False

Question 4

When actual inflation exceeds expected inflation,

Accepted Answer

A)  unemployment is equal to the natural rate of unemployment.
B)  people will reduce their expectations of inflation in the future.
C)  unemployment is greater than the natural rate of unemployment.
D)  unemployment is less than the natural rate of unemployment.E) B) and C)
F) A) and D)

Question 5

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Accepted Answer

A)  reduce inflation with little or no increase in unemployment.
B)  increase inflation but it would decrease unemployment by an unusually large amount.
C)  increase inflation with little or no decrease in unemployment.
D)  reduce inflation but it would increase unemployment by an unusually large amount.E) All of the above
F) B) and D)

Question 6

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

Accepted Answer

A)  a reduction in output of 5 per cent.
B)  a reduction in output of 15 per cent.
C)  a reduction in output of 20 per cent.
D)  a reduction in output of 35 per cent.E) All of the above
F) A) and B)

Question 7

Why does a downward sloping Phillips curve imply a positive sacrifice ratio?

Accepted Answer

A downward sloping Phillips curve implie...

Question 8

According to the theory of rational expectations,

Accepted Answer

A)  workers' experience tells them that government action to lower unemployment will not affect inflation.
B)  consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
C)  policy goals can be achieved more easily in the short run than in the long run.
D)  workers' wage demands include anticipated inflation.E) B) and D)
F) A) and D)

Question 9

Along a short run Phillips curve, a higher rate of

Accepted Answer

A)  growth in output is associated with a higher unemployment rate.
B)  growth in output is associated with a lower unemployment rate.
C)  inflation is associated with a higher unemployment rate.
D)  inflation is associated with a lower unemployment rate.E) B) and C)
F) A) and C)

Question 10

-Refer to Exhibit 6 above.If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent, the economy is operating at point

Accepted Answer

A)  A.
B)  B.
C)  E.
D)  H.
E)  I.F) A) and E)
G) B) and C)

Question 11

The Phillips curve and the short run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward.Discuss.

Accepted Answer

The Phillips curve shows the relation be...

Question 12

Which of the following will reduce the price level and increase real output in the long run?

Accepted Answer

A)  An increase in the money supply.
B)  An increase in wage rates.
C)  A decrease in the money supply.
D)  Technical progress.E) None of the above
F) A) and D)

Question 13

According to the theory of rational expectations,

Accepted Answer

A)  the Phillips curve is upward sloping in the short run and downward sloping in the long run.
B)  both in the short and long run, the Phillips curve is horizontal.
C)  the sacrifice ratio could be zero because economic agents will very quickly adjust their inflation expectations if they believe policy makers will succeed in reducing inflation.
D)  the sacrifice ratio is very high because rational workers will work less if their wages do not rise as quickly as they expect.E) All of the above
F) C) and D)

Question 14

-Refer to Exhibit 6 above.Suppose the economy is in long run equilibrium at point E.A sudden increase in government spending should move the economy in the direction of point

Accepted Answer

A)  A.
B)  B.
C)  D.
D)  E.
E)  G.F) A) and B)
G) None of the above

Question 15

-Refer to Exhibit 6 above.Suppose the economy is operating at point D.As people revise their price expectations,

Accepted Answer

A)  the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 3 per cent inflation.
B)  the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 9 per cent inflation.
C)  the short run Phillips curve will shift in the direction of the short run Phillips curve associated with an expectation of 6 per cent inflation.
D)  the long run Phillips curve will shift to the left.E) None of the above
F) A) and D)

Question 16

If people expect less inflation in the future, then the

Accepted Answer

A)  long run Phillips curve will become steeper.
B)  long run Phillips curve will become flatter.
C)  short run Phillips curve will become steeper.
D)  short run Phillips curve will shift down and to the left.E) A) and B)
F) A) and C)

Question 17

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Accepted Answer

A)  the Phillips curve was upward sloping, not downward sloping as first thought.
B)  there was no trade-off between inflation and unemployment in the long run.
C)  the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation.
D)  the aggregate supply curve actually sloped downward because price levels fell when real GDP rose.E) A) and D)
F) None of the above

Question 18

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Accepted Answer

A) True 
 B)False

Question 19

The natural rate of unemployment is

Accepted Answer

A)  the socially desired rate of unemployment.
B)  the unemployment rate that is observed in the long run regardless of the monetary policy pursued by the central bank.
C)  the unemployment rate that is observed in the long run regardless of all economic policies pursued by the government or central bank.
D)  always below 5 per cent.E) None of the above
F) A) and B)

Question 20

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation.If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Accepted Answer

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

Exam 17: The Short Run Trade-Off Between Inflation and Unemployment

According to the theory of rational expectations,

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-Refer to Exhibit 6 above.Suppose the economy is operating at point D.As people revise their price expectations,

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When actual inflation exceeds expected inflation,

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The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

Correct AnswerverifiedShow Answer

According to the theory of rational expectations,

Correct AnswerverifiedShow Answer

The Phillips curve and the short run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward.Discuss.

Correct AnswerverifiedThe Phillips curve shows the relation be...View AnswerShow Answer

-Refer to Exhibit 6 above.If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent, the economy is operating at point

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If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

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Why does a downward sloping Phillips curve imply a positive sacrifice ratio?

Correct AnswerverifiedA downward sloping Phillips curve implie...View AnswerShow Answer

Which of the following will reduce the price level and increase real output in the long run?

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The natural rate of unemployment is

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An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Correct AnswerverifiedShow Answer

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation.If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

Correct AnswerverifiedShow Answer

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Correct AnswerverifiedShow Answer

-Refer to Exhibit 6 above.Suppose the economy is in long run equilibrium at point E.A sudden increase in government spending should move the economy in the direction of point

Correct AnswerverifiedShow Answer

Some countries have had relatively high inflation and relatively high unemployment for long periods of time.Is this consistent with the Phillips curve? Defend your answer.

Correct AnswerverifiedThey are consistent with the long run Ph...View AnswerShow Answer

If people have rational expectations, a monetary policy contraction that is announced and is credible could

Correct AnswerverifiedShow Answer

Explain the connection between the vertical long run aggregate supply curve and the vertical long run Phillips curve.

Correct AnswerverifiedBoth reflect the classical dichotomy.The...View AnswerShow Answer

If people expect less inflation in the future, then the

Correct AnswerverifiedShow Answer

Along a short run Phillips curve, a higher rate of

Correct AnswerverifiedShow Answer

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The Phillips curve shows the relation be...
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A downward sloping Phillips curve implie...
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They are consistent with the long run Ph...
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Both reflect the classical dichotomy.The...
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Correct Answer
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