Name: 
 

Chapter 35                                Mankiw/Taylor, Economics



True/False
Indicate whether the sentence or statement is true or false.
 

 1. 

The Phillips curve illustrates the positive relationship between inflation and unemployment.
 

 2. 

If inflation is 4 per cent and unemployment is 6 per cent, the misery index is 2 per cent.
 

 3. 

In the short run, an increase in aggregate demand increases prices and output, and decreases unemployment.
 

 4. 

When unemployment is below the natural rate the labour market is unusually tight, putting pressure on wages and prices to rise.
 

 5. 

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.
 

 6. 

An increase in the money supply increases inflation and permanently decreases unemployment.
 

 7. 

In the long run, the unemployment rate is independent of inflation and the Phillips curve is vertical at the natural rate of unemployment.
 

 8. 

When actual inflation exceeds expected inflation, unemployment exceeds the natural rate.
 

 9. 

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.
 

 10. 

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.
 

 11. 

A decrease in unemployment benefits reduces the natural rate of unemployment and shifts the long-run Phillips curve to the right.
 

 12. 

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

 13. 

A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.
 

 14. 

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.
 

 15. 

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.
 

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 16. 

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.
 

 17. 

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.
 

 18. 

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.
 

 19. 

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.
 

 20. 

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.
 

 21. 

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
 

 22. 

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.
 

 23. 

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
 

 24. 

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.
 

 25. 

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.
 

 26. 

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.
 

 27. 

mc027-1.jpg

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
a.
B.
b.
I.
c.
A.
d.
E.
e.
H.
 

 28. 

mc028-1.jpg

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
a.
H.
b.
C.
c.
D.
d.
A.
e.
F.
 

 29. 

mc029-1.jpg

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
a.
D.
b.
G.
c.
E.
d.
B.
e.
A.
 

 30. 

mc030-1.jpg

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.
 

 31. 

mc031-1.jpg

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
a.
H.
b.
F.
c.
E.
d.
C.
e.
A.
 

 32. 

mc032-1.jpg

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
a.
F.
b.
A.
c.
H.
d.
I.
e.
B.
 

 33. 

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.
 

 34. 

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.
 

 35. 

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.
 



 
Check Your Work     Start Over