True/False
Indicate whether the
sentence or statement is true or false.
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1.
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The Phillips curve illustrates the positive
relationship between inflation and unemployment.
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2.
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If inflation is 4 per cent and unemployment is 6
per cent, the misery index is 2 per cent.
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3.
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In the short run, an increase in aggregate demand
increases prices and output, and decreases unemployment.
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4.
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When unemployment is below the natural rate the
labour market is unusually tight, putting pressure on wages and prices to rise.
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5.
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An increase in price expectations shifts the
Phillips curve upward and makes the inflation unemployment trade-off less favourable.
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6.
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An increase in the money supply increases inflation
and permanently decreases unemployment.
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7.
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In the long run, the unemployment rate is
independent of inflation and the Phillips curve is vertical at the natural rate of
unemployment.
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8.
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When actual inflation exceeds expected inflation,
unemployment exceeds the natural rate.
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9.
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The natural rate hypothesis suggests that, in the
long run, unemployment returns to its natural rate, regardless of inflation.
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10.
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An adverse supply shock, such as an increase in the
price of imported oil, shifts the Phillips curve upward and makes the inflation unemployment
trade-off less favourable.
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11.
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A decrease in unemployment benefits reduces the
natural rate of unemployment and shifts the long-run Phillips curve to the right.
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12.
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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.
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13.
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A sudden monetary contraction moves the economy up
a short-run Phillips curve, reducing unemployment and increasing inflation.
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14.
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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.
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15.
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If the sacrifice ratio is four, a reduction of
inflation from 9 per cent to 5 per cent requires a reduction in output of 8 per cent.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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The misery index, which some commentators suggest
measures the health of the economy, is
a. | the sum of the growth rate of output and the inflation
rate. | b. | the sum of the natural rate of unemployment and the
actual rate of unemployment. | c. | the sum of the
inflation rate and the central bank’s refinancing rate. | d. | the sum of the unemployment rate and the inflation
rate. |
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17.
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The original Phillips curve
illustrates
a. | the trade-off between inflation and
unemployment. | b. | the trade-off
between output and unemployment. | c. | the positive
relationship between output and unemployment. | d. | the positive
relationship between inflation and unemployment. |
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18.
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The Phillips curve is an extension of the model of
aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand
increases prices and
a. | decreases unemployment. | b. | decreases growth. | c. | increases
unemployment. | d. | decreases
inflation. |
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19.
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Along a short-run Phillips curve,
a. | a higher rate of inflation is associated with a lower
unemployment rate. | b. | a higher rate of
growth in output is associated with a lower unemployment rate. | c. | a higher rate of inflation is associated with a higher unemployment
rate. | d. | a higher rate of growth in output is associated with a
higher unemployment rate. |
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20.
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If, in the long run, people adjust their price
expectations so that all prices and incomes move proportionately to an increase in the price level,
then the long-run Phillips curve
a. | is vertical. | b. | is negatively sloped. | c. | has a slope that
is determined by how fast people adjust their price expectations. | d. | is positively sloped. |
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21.
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According to the Phillips curve, in the short run,
if policy makers choose an expansionary policy to lower the rate of unemployment,
a. | the economy will experience an increase in
inflation. | b. | the economy will
experience a decrease in inflation. | c. | inflation will be
unaffected if price expectations are unchanging. | d. | none of these answers |
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22.
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An increase in expected inflation
a. | shifts the short-run Phillips curve downward and the
unemployment inflation trade-off is less favourable. | b. | shifts the short-run Phillips curve upward and the unemployment inflation
trade-off is more favourable. | c. | shifts the
short-run Phillips curve downward and the unemployment inflation trade-off is more
favourable. | d. | shifts the
short-run Phillips curve upward and the unemployment inflation trade-off is less
favourable. |
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23.
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Which of the following would shift the long-run
Phillips curve to the right?
a. | An increase in the minimum
wage | b. | An increase in expected
inflation | c. | An increase in the price of foreign
oil | d. | An increase in aggregate
demand |
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24.
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When actual inflation exceeds expected
inflation,
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. |
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25.
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A decrease the price of foreign oil
a. | shifts the short-run Phillips curve downward, and makes
the unemployment inflation trade-off less favourable. | b. | shifts the short-run Phillips curve upward, and makes the unemployment
inflation trade-off less favourable. | c. | shifts the
short-run Phillips curve upward, and makes the unemployment inflation trade-off more
favourable. | d. | shifts the
short-run Phillips curve downward, and makes the unemployment inflation trade-off more
favourable. |
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26.
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The natural rate hypothesis argues
that
a. | in the long run, the unemployment rate returns to the
natural rate, regardless of inflation. | b. | unemployment is
always below the natural rate. | c. | unemployment is
always above the natural rate. | d. | unemployment is
always equal to the natural rate. |
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27.
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Refer to Exhibit 6. 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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28.
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 Refer to Exhibit 6. If people in the economy expect inflation to be 6 per cent
but inflation turns out to be 3 per cent, the economy is operating at point
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29.
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Refer to Exhibit 6. 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
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30.
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 Refer to Exhibit 6. Suppose the economy is operating at point D. As people
revise their price expectations,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. |
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31.
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 Refer to Exhibit 6. Suppose the economy is operating in long-run equilibrium
at point E. An unexpected monetary contraction will move the economy in the direction of
point
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32.
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 Refer to Exhibit 6. Suppose the economy is operating in long-run equilibrium
at point E. In the long run, a monetary contraction will move the economy in the direction of
point
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33.
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If people have rational expectations, a monetary
policy contraction that is announced and is credible could
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. |
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34.
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If the sacrifice ratio is five, a reduction in
inflation from 7 per cent to 3 per cent would require
a. | a reduction in output of 20 per
cent. | b. | a reduction in output of 5 per
cent. | c. | a reduction in output of 15 per
cent. | d. | a reduction in output of 35 per
cent. |
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35.
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If a country’s policy makers were to
continuously use expansionary monetary policy in an attempt to hold unemployment below the natural
rate, the long-run result would be
a. | an increase in the level of
output. | b. | a decrease in the unemployment
rate. | c. | an increase in the rate of
inflation. | d. | all of these
answers. |
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