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Friedman and Phelps argued that it was dangerous to think of the short-run Phillips curve as a menu of options for policymakers to choose from. Explain the logic of their argument.

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Eventually the economy moves back to the...

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If people believe that the central bank is going to reduce inflation, then


A) the short-run Phillips curve shifts right and the sacrifice ratio will rise.
B) the short-run Phillips curve shifts right and the sacrifice ratio will fall.
C) the short-run Phillips curve shifts left and the sacrifice ratio will rise.
D) the short-run Phillips curve shifts left and the sacrifice ratio will fall.

E) All of the above
F) B) and C)

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then


A) unemployment falls, but it would have fallen less if people had been expecting 12.5% inflation.
B) unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
C) unemployment rises, but it would have risen less if people had been expecting 12.5% inflation.
D) unemployment rises, but it would have risen less if people had been expecting 25% inflation.

E) B) and C)
F) A) and B)

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If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?


A) both the price level and output
B) the price level but not output
C) output but not the price level
D) neither output nor the price level

E) A) and B)
F) All of the above

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The misery index is supposed to measure the


A) social cost of unemployment.
B) health of the economy.
C) lost output associated with a particular unemployment rate.
D) short-run tradeoff between inflation and unemployment.

E) A) and B)
F) None of the above

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If Flosserlanders believe their government then which, if any, curves) shift left?


A) the short-run and the long-run Phillips curve
B) the short-run but not the long run Phillips curve
C) the long-run but not the short-run Phillips curve
D) neither the short-run nor the long-run Phillips curve

E) A) and C)
F) None of the above

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An adverse supply shock causes output to


A) rise. To counter this a central bank would increase the money supply.
B) rise. To counter this a central bank would decrease the money supply.
C) fall. To counter this a central bank would increase the money supply.
D) fall. To counter this a central bank would decrease the money supply.

E) None of the above
F) A) and B)

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Friedman and Phelps argued


A) that in the long run, monetary growth did not influence those factors that determine the economy's unemployment rate.
B) that the Phillips curve could be exploited in the long run by using monetary, but not fiscal policy.
C) that the short-run Phillips curve was very steep, but not vertical.
D) that there was neither a short-run nor long-run tradeoff between inflation and unemployment.

E) B) and C)
F) A) and D)

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A favorable supply shock causes the price level to


A) rise. To counter this a central bank would increase the money supply.
B) rise. To counter this a central bank would decrease the money supply.
C) fall. To counter this a central bank would increase the money supply.
D) fall. To counter this a central bank would decrease the money supply.

E) B) and C)
F) A) and C)

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If asset prices fall and inflation expectations remain unchanged, what happens to inflation and unemployment? Defend your answer.

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Inflation falls and unemployment rises. ...

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Which of the following statements is correct?


A) In the short run, unemployment and inflation are positively related. In the long run they are largely unrelated problems.
B) Inflation and unemployment are positively related in the short run and in the long run.
C) In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems.
D) Inflation and unemployment are negatively related in the short run and in the long run.

E) B) and D)
F) A) and B)

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Natural rate of unemployment - a Γ— Ξ‘ctual inflation - Expected inflation) =


A) Quantity of goods and services demanded.
B) Quantity of goods and services supplied.
C) Unemployment rate.
D) Previous year's inflation rate.

E) A) and B)
F) B) and C)

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Other things the same, if there is an increase in the money supply growth rate that is larger than expected, then in the short run


A) the natural rate of unemployment rises.
B) the natural rate of unemployment falls.
C) the unemployment rate will be above its natural rate.
D) the unemployment rate will be below its natural rate.

E) B) and D)
F) A) and B)

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures. Then


A) unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
B) unemployment falls, but it would have fallen less if people had been expecting 35% inflation.
C) unemployment rises, but it would have risen less if people had been expecting 25% inflation.
D) unemployment rises, but it would have risen less if people had been expecting 35% inflation.

E) All of the above
F) B) and D)

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As an economist working for a U.S. government agency you determine that a particular country has a sacrifice ratio of 3. Policy-makers in that country are thinking of lowering the inflation rate from 10% to 4%. Is this sacrifice ratio higher or lower than the typical estimate? From your numbers, what is the amount of output that will be lost for this country to reduce its inflation rate?


A) The sacrifice ratio is higher than the typical estimate. It will cost 30% of annual output to reach the new inflation target.
B) The sacrifice ratio is higher than the typical estimate. It will cost 18% of annual output to reach the new inflation target.
C) The sacrifice ratio is lower than the typical estimate. It will cost 30% of annual output to reach the new inflation target.
D) The sacrifice ratio is lower than the typical estimate. It will cost 18% of annual output to reach the new inflation target.

E) All of the above
F) B) and C)

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Figure 35-3. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate. Figure 35-3. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate. -Refer to Figure 35-3. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was A) 144. B) 150. C) 152. D) 156. Figure 35-3. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the left-hand diagram, Y represents output and on the right-hand diagram, U represents the unemployment rate. -Refer to Figure 35-3. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was A) 144. B) 150. C) 152. D) 156. -Refer to Figure 35-3. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was


A) 144.
B) 150.
C) 152.
D) 156.

E) B) and C)
F) A) and D)

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Figure 35-5 Figure 35-5 -Refer to figure 35-5. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve? A) A, B B) A, D C) C, B D) None of the above is correct. -Refer to figure 35-5. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve?


A) A, B
B) A, D
C) C, B
D) None of the above is correct.

E) A) and C)
F) A) and B)

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Friedman argued that the Fed could use monetary policy to peg


A) the level of real GDP.
B) the growth rate of real GDP.
C) the rate of unemployment.
D) None of the above is correct.

E) B) and C)
F) B) and D)

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Government expenditures increase. What happens to the price level and output? Explain how the change in the price level and output effect the inflation rate and the unemployment rate.

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The price level and output ris...

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Figure 35-9. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate." Figure 35-9. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the right-hand diagram, Inf Rate means Inflation Rate. -Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the A) increase in the inflation rate as a temporary aberration. B) economic boom as a temporary aberration. C) increase in the inflation rate as a sign of a new era of higher inflation. D) economic boom as a sign of a new era of higher economic growth. Figure 35-9. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the right-hand diagram, Inf Rate means Inflation Rate. -Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the A) increase in the inflation rate as a temporary aberration. B) economic boom as a temporary aberration. C) increase in the inflation rate as a sign of a new era of higher inflation. D) economic boom as a sign of a new era of higher economic growth. -Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the


A) increase in the inflation rate as a temporary aberration.
B) economic boom as a temporary aberration.
C) increase in the inflation rate as a sign of a new era of higher inflation.
D) economic boom as a sign of a new era of higher economic growth.

E) A) and B)
F) A) and C)

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