Chapter 11&12
According to the accelerationist Phillips curve _____. a) inflation will change so long as unemployment gap persists b) increases in inflation cause the unemployment gap to widen c) expectations adjust continually to the latest information d) all of the above
A
Rising inflation causes quantity demanded to decline because ______. a) the central bank raises the nominal interest rate by more than the increase in expected inflation b) higher inflation causes the IS curve to shift to the left c) households and businesses are reluctant to spend when prices rise d) all of the above
A
The natural rate of output is _____. a) independent of the inflation rate b) unrelated to the natural rate of unemployment c) always lower than potential output d) all of the above
A
The price of a barrel of oil doubled between 2007 and 2008. To make matters worse, a financial crisis hit the US economy starting in August 2007. Which of the following is an appropriate description of the mechanism that would have ensued? a) shifts in both AD and AS curve would have ensued in the short-run but as long as neither shock had an impact on the potential output, ultimately unemployment will have been unaffected in the long run b) the financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right c) the increase in the price of oil would have immediately shifted the AS curved to the right d) all of the above
A
The short-run aggregate supply curve shows that a change in inflation will cause changes in _____. a) expected inflation b) price shocks c) potential output d) output e) all of the above
A
In Milton Friedman and Edmund Phelps' expectations-augmented Philips curve, ________. a) inflation is positively related to unemployment gap b) unemployment will, in the long run, reach the natural rate c) in the long run, expected inflation will reach the NAIRU d) all of the above
B
On the modern Philips curve, the initial impact of government policies to stimulate the economy is shown by _____. a) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment rate b) an upward movement along the Philips curve to a higher inflation rate c) a downward movement along the Philips curve to higher unemployment rates d) an upward shift of the Philips curve leading to higher inflation rates for any unemployment rate
B
What is the main difference between a demand shock stemming from monetary policy and a demand shock that comes from change in spending? a) an autonomous monetary policy easing has a temporary effect on the real interest rate whereas a positive spending shock has a permanent effect on the real interest rate b) in the short-run, an autonomous monetary policy easing lowers real interest rates and raises aggregate output whereas a positive spending shock has the opposite effect on both variables c) an autonomous monetary policy easing raises inflation permanently, whereas a positive spending shock only raises inflation temporarily d) all of the above
B
in 2005 hurricane Katrina devastated large portions of the Gulf Coast economy. Many refineries went offline disrupting oil refining and distribution. What do you think was likely the result? a) the restricted supply constituted a cost push shock that would have meant an upward movement along the Phillips curve b) the restricted supply constituted a cost push shock that would have shifted the short run AS curve to the left c) the restricted supply constituted a cost push shock that would have shifted the long run AS curve to the right d) all of the above
B
A fall in import prices or an increase in productivity _____. a) typically comes with a reduction in output b) typically lead to a rise in commodity prices c) constitute a positive supply shock d) all of the above
C
In the short-run ______. a) if wages and prices are sticky, aggregate output is always at its potential level b) the more sticky wages and prices are, the more difficult to tell the difference between the short and long run aggregate supply curve c) the more flexible wages and prices are, the more inflation responds to the output gap d) all of the above
C
On the modern Philips curve, the initial impact of productivity improvements that lower cost of production is ____. a) an upward movement along the Phillips curve to higher inflation rate b) a downward movement along the Phillips curve to higher unemployment rate c) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment rate d) an upward shift of the Phillips curve leading to higher inflation rates for an unemployment rate
C
On the modern Phillips curve, the beginning of a recession is shown by _____. a) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment rate b) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment rate c) a downward movement along the Phillips curve to higher unemployment rates d) an upward movement along the Phillips curve to a higher inflation rate
C
The aggregate demand curve shifts to the left when there is _____. a) an increase in inflation b) an increase in the nominal interest rate c) autonomous tightening of monetary policy d) all of the above
C
Which of the following shows a negative relationship between output and the unemployment gap? a) Phillips curve b) the classical dichotomy c) Okun's law d) the AS curve
C
A change in the output gap is likely to lead to _____. a) a change in expected inflation b) a change in inflation c) a shift of short-run aggregate supply curve d) all of the above
D
According to the short-run aggregate supply curve, if output minus potential output equals zero, then ____. a) price shocks must be zero b) unemployment might be zero c) expected inflation might be stable d) actual inflation equals expected inflation
D
An autonomous increase in net exports for any given inflation rate ______. a) would raise the equilibrium level of output b) the aggregate demand curve would shift to the right c) would add directly to planned expenditures d) all of the above
D
As wages and prices become more sticky _____. a) wages become less responsive to unemployment deviations from the natural rate b) it becomes easier to differentiate the short-run c) the short-run Phillips curve gets flatter d) all of the above
D
By the time Paul Volcker took office as the Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By 1982, the unemployment rate soared to 9.7% and inflation was cut to 6.2%. By the end of 1986 the unemployment rate was brought down to 7% and inflation rate was brought further down to 1.9%. Which of the following is an appropriate description of the mechanism behind the Volcker disinflation? a) by 1982, it is likely that equilibrium output was lower than potential leading the AS curve to shift to the right to close the output gap toward a general equilibrium which explains the reduction in the unemployment rate and the further reduction in inflation between 1982 and 1986 b) due to the autonomous tightening and monetary policy, a negative output gap ensued which explains the increase in the unemployment rate between 1979 and 1982 c) the AD curve likely shifted left due to the autonomous tightening of monetary policy which explains lowering of inflation rate between 1979 and 1982 d) all of the above
D
By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, both the inflation and unemployment rates were higher than during most of the 1950s, 60s, and 70s. The Federal Reserve implemented an autonomous tightening of monetary policy that resulted in the famous Volker disinflation which was successful in bringing both problems under control. Which of the following is an appropriate description had Mr. Volker conducted and expansionary monetary policy instead? a) the AD curve would have likely shifted right due to the Federal Reserve lowering of interest rates which might have resulted in a temporary decline in the unemployment rate but at the cost of skyrocketing inflation b) due to the autonomous expansion of monetary policy the unemployment rate might have artificially declined. However, the AS curve would have shifted left to close the ensuing positive output gap thereby returning the unemployment rate to the levels prior to the Fed's actions while, likely, making inflation even worse than before c) due to the autonomous expansion of monetary policy, a temporary positive output gap might have ensued thereby decreasing the unemployment rate while exerting huge inflationary pressure in the economy d) all of the above
D
By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, both the inflation and unemployment rats were higher than during most of the 1950s, 60s, and 70s. The Federal Reserve implemented an autonomous tightening of monetary policy that resulted in the famous Volcker disinflation which was successful in bringing both problems under control. What would have been a likely result had Volker conducted an expansionary monetary policy instead? a) in the short-run both inflation and unemployment would have declined but in the long-run unemployment would have been worse than before the Feds action b) inflation would have been made worse right away but unemployment would have been permanently lowered c) in the short-run both inflation and unemployment would have been made worse but both would have been lowered in the long-run d) in the long run the unemployment problem would not have been fixed and the inflation problem would have been made much worse
D
By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By the end of 1986 the inflation rate had been brought down to 1.9%. Which of the following is true about the Volcker disinflation? a) lower inflation resulted from a tightening of monetary policy b) this policy induced a substantial negative output gap c) by raising the federal funds rate to over 20%, the Federal Reserve slowed the economy and was able to cut inflation in half by 1982 at the cost of a substantial hike in the unemployment rate causing a recession d) all of the above
D
If expectations about inflation are adaptive, they are____. a) likely to change slowly b) not based on all available relevant information c) backward looking d) all of the above
D
If for any given inflation rate, the federal government lowered taxes, ______. a) the aggregate demand curve would shift to the right b) it would raise disposable income leading to higher consumption spending c) it would have similar qualitative result on output as an increase in government purchases d) all of the above
D
If the adoption of a new technology led to gains in productivity ______. a) in the short-run, the ensuing increase in supply would lower inflation b) and if this new technology permanently altered the productivity capacity of the economy then the increase in output and decrease in inflation would be permanent as well c) the ensuing positive supply shock would lead to an immediate increase in output d) all of the above
D
If the unemployment rate is below its natural rate, then _____. a) there is excess tightness in the labor market b) wages and prices will rise more rapidly and the AS curve will shift to the left c) output is above its potential level d) all of the above
D
If wages and prices become extremely flexible ______. a) it becomes very difficult to differentiate the short-run from the long-run Phillips curve b) there is no trade off between inflation and unemployment c) unemployment can hardly deviate from the natural rate d) all of the above
D
In the 1960s, the Philips curve was _____. a) consistent with a clear negative relationship between inflation and unemployment b) a very popular explanation for inflation fluctuations c) suggestive of a permanent trade off between inflation and unemployment d) all of the above
D
In the long run _____. a) aggregate supply is fixed at the potential level of output b) there is enough time for prices to fully adjust so the classical dichotomy holds c) the amount of output an economy can produce is determined by real variables like capital, labor, and technology d) all of the above
D
In the long run _____. a) the aggregate supply is vertical with respect to output b) fluctuation in the inflation rate have no impact on output and unemployment c) the Phillips curve is vertical with respect to unemployment d) all of the above
D
In the long run, we typically assume that ____. a) aggregate supply is fixed and independent of the level of inflation b) the natural rate of unemployment is independent of the level of inflation c) capital, labor, and technology are independent of the level of inflation d) all of the above
D
In the short run, ______. a) the aggregate supply curve may shift to the left with increases in expected inflation b) cost push shocks can cause firms to raise prices c) workers pushing for higher wages may lead to increases in inflation d) all of the above
D
Milton Friedman and Edmund Phelps contributed which insights to the Philips curve analysis? a) that in the long run unemployment will be at the natural rate b) that inflation is directly related to expectations of future inflation c) that inflation is negatively related to the unemployment gap d) all of the above
D
Milton Friedman and Edmund Phelps contributed which insights to the Philips curve analysis? a) that, in the long run, the level of unemployment is independent of inflation b) that inflation and expected inflation influence each other c) that firms and workers care about real wages d) all of the above
D
On the modern Philips curve, the initial impact of an increase in the world price of steel is shown by _____. a) an upward movement along the Philips curve to a higher inflation rate b) a downward shift of the Philips curve leading to lower inflation rates for any unemployment rate c) a downward movement along the Phillips curve to higher unemployment rates d) an upward shift of the Philips curve leading to higher inflation rates for any unemployment rate
D
Picture an economy that is in general equilibrium. What would happen if the natural rate of unemployment were to experience an increase? a) according to Okun's Law, the ensuing negative unemployment gap would be consistent with a positive output gap b) according to the AD-AS framework, the LRAS curve would shift to the left and the ensuing positive output gap would be closed by subsequent leftward shifts in the AS curve to higher equilibrium levels of inflation c) according to the Phillips curve, the ensuing negative unemployment gap would exert inflationary pressures d) all of the above
D
Suppose there is a temporary supply shock because of a war in the Middle East, then ____. a) the AS curve would shift to the left b) that could theoretically lead to stagflation c) this would constitute a cost push shock due to a restriction in the supply of oil d) all of the above
D
The assumption that in the long run prices and wages are fully flexible implies that the long-run aggregate supply curve is determined by _____. a) technology b) capital and labor inputs c) the natural rate of unemployment d) all of the above
D
The idea behind the Philips curve is that ______. a) when the unemployment rate is low, wages will increase b) tight labor markets lead to inflationary pressures c) when firms raise wages to attract new workers, prices will also increase d) all of the above
D
The price of a barrel of oil doubled between 2007 and 2008. To make matters worse, a financial crisis hit the US economy starting August of 2007. Which of the following is true of the UK's experience? a) eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate b) the increase in the price of oil immediately shifted the AS curve to the left c) the financial crisis did not take hold right away so the AD curve did not immediately shift d) all of the above
D
Under a favorable business environment and if the economic outlook of the future looked promising ____. a) firms might spend more for a given inflation rate b) the aggregate demand curve would likely shift to the right c) planned investment might increase leading to higher equilibrium level of output d) all of the above
D
What can be concluded from Milton Friedman and Edmund Phelps' expectations-augmented Phillips curve? a) there are 2 types of Philips curves b) that there is a short run tradeoff between unemployment and inflation c) that there is a long run tradeoff between unemployment and inflation d) all of the above
D
When a temporary shock in the economy involves a restriction in supply ______. a) a reduction in output typically ensues b) a rise in commodity prices typically follows c) we refer to it as a negative supply shock d) all of the above
D
Which of the following is linked to an adverse supply shock? a) the wage renegotiations that followed the termination of US wage and price controls in the 1973 b) The Arab-Israeli war of 1979 c) the Iranian revolution of 979 d) all of the above
D
Which of the following is true in regards to Okun's law? a) employment does not increase commensurately with output rises because the firms tend to hoard labor b) it is Okun's prediction of the negative relationship between the output and unemployment gaps that allows the modern Phillips curve to be translated into the AS curve c) when demand increases, firms tend to work their employees harder and longer d) all of the above
D
Which of the following might cause an upward shift of the modern Philips curve? a) an increase in oil prices b) wage agreements that include compensation for inflation c) an increase in the price of imports d) all of the above
D
Which statement is consistent with a positive relationship between inflation and the output gap? a) Through Okun's law, the negative relationship between output and unemployment gaps allows the modern Phillips curve to be translated into the AS curve b) in the short run, the AS curve is upward sloping c) If output rises above its potential level, the unemployment rate falls and firms will raise wages/prices more rapidly d) all of the above
D
