Chapter 17 Homework

When the Phillips curve was first formulated (late 1960s), many economists thought that it showed a

"menu" of possible choices available to policy makers.

A study of the U.S. price level and real GDP from 1972 to 2007 reveals a clear upward march toward higher prices and greater output. What explains this?

Both the aggregate demand curve and the aggregate supply curve have shifted to the right year after year.

In Figure 17-8, which of the following movements illustrates the response of the economy to a stimulation of aggregate demand when workers systematically underpredict inflation?

C to A.

In Figure 17-7, the case for restrictive monetary and fiscal policy is strongest at point

D

If actual inflation differs from expected inflation, what is the slope of the Phillips curve?

It is downward sloping in the short run and vertical in the long run.

If you believe that expectations react slowly, you are likely:

Keynesian.

Which of the following led to the collapse of the Phillips Curve?

Leftward shift of the aggregate supply curve

If the short-run Phillips curve has a very steep slope, the

inflation consts of reducing unemployment are relatively high.

According to the theory of rational expectations, the government can influence output

only by making unexpected changes in aggregate demand.

A reduction in aggregate demand will normally reduce

prices, real GDP, employment

Demand-side inflation is normally accompanied by

rising real GDP, while supply-side inflation may be accompanied by falling real GDP.

The economy's self-correcting mechanism

tends to push unemployment toward a specific point called the natural rate of unemployment.

The data illustrated in Figure 17-5 would be most representative of which decade?

the 1970s

If an economy's resources are fully employed,

the aggregate supply curve (and thus the Phillips curve) will be steep.

Aggregate demand grows because

the government increases its spending, a growing population increases consumer spending, and the Fed increases the money supply.

Many economists think that, in the long run, the economy tends to move toward

the natural or full-employment rate of unemployment.

All points on the long run Phillips curve that are sustainable in the long run due to economy's self correcting mechanism correspond to

the natural rate of unemployment.

Over a five-year period, economists observed that the unemployment-inflation relationship appeared as in Figure 17-5. Economic theory would conclude that the period

was dominated by supply shocks such as increased energy and food costs.

The theory of rational expectations says that

workers make the best possible forecasts of inflation.

Demand-side inflation differs from supply-side inflation in the following way:

demand-side inflation has higher output; supply-side inflation has lower output.

If AD increases at a faster rate than AS, the result will be

demand-side inflation.

One way in which the Phillips curve is misinterpreted is to think of it as

depicting a number of alternative equilibrium points the economy could achieve.

If AS increases at a faster rate than AD, the result will be

falling prices.

If fluctuations in economic activity come from the supply side, higher inflation is associated with

higher rates of unemployment.

If the favorable supply shocks of the 1990s were reversed in the future, we should expect a(n)

increase in inflation and unemployment.

Which panel in Figure 17-4 shows the movement associated with a demand-side inflation?

2

The unemployment rate for the U.S. economy in 2014 averaged about

6.5 percent

In Figure 17-8, which of the following movements reflects the closing of an inflationary gap through the economy's automatic adjustment mechanism?

A to B

A decrease in AS will trigger more inflation under which of the following conditions?

AD is relatively steep.

Which of the following is most likely to result in inflation?

Aggregate demand grows more rapidly than aggregate supply.

In Figure 17-8, policy makers can choose any of the following points as sustainable inflation-unemployment combinations:

B,E,C

Which of the factors below contributed to the collapse of the Phillips curve in the 1970s?

The 1970s were full of adverse supply shocks such as the oil price increases of 1973-1974.

Many economists think that, in the long run, the Phillips curve is

a vertical line.

In the 1990s, the rising value of the U.S. dollar made imported goods cheaper and this shifted the

aggregate supply curve outward.

A non-policy reason for the reduction in the natural rate of unemployment is the

aging of the US labor force.

Which of the following could trigger demand-side inflation?

an increase in government spending.

Which of the following could trigger supply-side inflation?

an increase in raw materials' prices.

If workers demand wage compensation in advance of inflation, the economy's aggregate supply curve will

be vertical.

In the short run, fiscal and monetary policy cause unemployment and inflation to move in opposite directions because

both policies control only aggregate demand.

In the 1990s, the United States benefited from a series of favorable supply shocks. This caused a(n)

decrease in inflation and unemployment.