chapter 22

Which of the following would we not expect if government policy moved the economy down along a given short-run Phillips curve? a. Jackie gets more job offers. b. Miguel makes smaller increases in the prices at his health food store. c. Teresa reads in the newspaper that the central bank recently decreased the money supply. d. Julie's nominal wage increase is smaller.

a. Jackie gets more job offers.

Which of the following would not tend to shorten recessions associated with anti-inflation policies by central banks? a. The long-run Phillips curve shifts to the right. b. The short-run Phillips curve shifts rapidly. c. People believe policy announcements made by central bank officials. d. People adjust their expectations of inflation rapidly.

a. The long-run Phillips curve shifts to the right.

If the response to an adverse supply shock leads to an increase in the money supply and a rise in inflation, the central bank is said to a. accommodate the adverse supply shock. b. aggregate the adverse supply shock. c. average the adverse supply shock. d. appreciate the adverse supply shock.

a. accommodate the adverse supply shock.

The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right when there is a(n) a. adverse supply shock. b. favorable supply shock. c. favorable demand shock. d. adverse demand shock.

a. adverse supply shock.

Which of the following did not play a role in depressing aggregate demand in 2001? a. collapse of housing prices b. the terrorist attacks on September 11 of that year c. corporate accounting scandals d. the end of a stock-market bubble

a. collapse of housing prices

The long-run Phillips curve would shift to the right if a. effective job-training programs were eliminated, but not if the money supply growth rate increased. b. the money supply growth rate increased, but not if effective job-training programs were eliminated. c. the money supply growth rate increased or if effective job-training programs were implemented. d. effective job-training programs were implemented, but not if the money supply growth rate increased.

a. effective job-training programs were eliminated, but not if the money supply growth rate increased.

If the government cuts government expenditures, then in the short run prices a. fall and unemployment rises. b. rise and unemployment rises. c. rise and unemployment falls. d. fall and unemployment falls.

a. fall and unemployment rises.

According to the theory of rational expectations, people ____ a. optimally use all the information they have when forecasting the future. b. use the previous time period to forecast the future. c. use an adaptive strategy. d. use some, but not all, of the available information.

a. optimally use all the information they have when forecasting the future.

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. reduce inflation but it would increase unemployment by an unusually large amount. d. increase inflation with little or no decrease in unemployment.

a. reduce inflation with little or no increase in unemployment.

In the short run, an adverse supply shock would cause the price level to a. rise and output to fall. b. rise and output to rise. c. fall and output to rise. d. fall and output to fall.

a. rise and output to fall.

The number of percentage points annual output falls for each percentage point reduction in inflation is the a. sacrifice ratio. b. stabilization ratio. c. scarcity ratio. d. savings ratio.

a. sacrifice ratio.

Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally bad conditions for growing crops. The bad weather would a. shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right. b. shift both the short-run aggregate-supply and the short-run Phillips curves right. c. shift the short-run aggregate-supply curve to the right, and the short-run Phillips curve to the left. d. shift both the short-run aggregate-supply and the short-run Phillips curves left.

a. shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right.

The Greenspan era can be characterized as being one that ____ a. the Federal Reserve was careful to avoid the policy mistakes of the 1960s. b. the economy featured high unemployment and high inflation. c. is viewed as a complete failure of the Federal Reserve by almost all economists. d. monetary policy was never used.

a. the Federal Reserve was careful to avoid the policy mistakes of the 1960s.

According to the Phillips curve, unemployment and inflation are not related at all in a. the long run, but not in the short run. b. the short run, but not in the long run. c. the short run and in the long run. d. neither the long run nor the short run.

a. the long run, but not in the short run.

If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities does not move closer to its pre-shock value as a result? a. the price level but not output b. both the price level and output c. neither output nor the price level d. output but not the price level

a. the price level but not output

Which of the following is not associated with an adverse supply shock? a. the short-run aggregate-supply curve shifts right b. unemployment rises c. output falls d. the price level rises

a. the short-run aggregate-supply curve shifts right

The original Phillips curve illustrates a. the trade-off between inflation and unemployment. b. the positive relationship between output and unemployment. c. the positive relationship between inflation and unemployment. d. the trade-off between output and unemployment.

a. the trade-off between inflation and unemployment.

Other things the same, if there is a decrease in the money supply growth rate that is larger than expected, then in the short run a. the unemployment rate will be above its natural rate. b. the natural rate of unemployment falls. c. the natural rate of unemployment rises. d. the unemployment rate will be below its natural rate.

a. the unemployment rate will be above its natural rate.

In which of the following periods of U.S. economic history did expected inflation appear not to fall and the short-run Phillips curve remained relatively stable as a result? a. the very low inflation in 2009 and 2010 b. the Volcker disinflation of the 1980s c. the oil shocks of the 1970s d. the Great Depression of the 1930s

a. the very low inflation in 2009 and 2010

Which of the following is the socially optimal rate of unemployment? a. full employment rate of unemployment b. The socially optimal rate of unemployment is determined by society's values and is not necessarily the natural rate or full-employment rate of unemployment nor is it zero. c. the natural rate of unemployment d. zero percent unemployment

b. The socially optimal rate of unemployment is determined by society's values and is not necessarily the natural rate or full-employment rate of unemployment nor is it zero.

According to the natural-rate hypothesis, the expansionary policies of the 1960s would result in ____ in the 1970s. a. no change in unemployment b. a return to higher unemployment c. a continued negative relationship between inflation and unemployment d. a continued lower unemployment

b. a return to higher unemployment

In the long run, which of the following would shift the long-run Phillips curve to the left? a. an increase in the money supply b. an increase in right-to-work laws that limit collective bargaining c. an increase in the minimum wage d. a decrease in the money supply

b. an increase in right-to-work laws that limit collective bargaining

Which of the following would shift the long-run Phillips curve to the right? a. an increase in expected inflation b. an increase in the minimum wage c. an increase in the price of foreign oil d. an increase in aggregate demand

b. an increase in the minimum wage

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 inflation. b. decreases unemployment. c. increases unemployment. d. decreases growth.

b. decreases unemployment.

Slowing a car down is like ________, whereas putting the car into reverse gear is like ________. a. disinflation; inflation b. disinflation; deflation c. inflation; disinflation d. deflation; disinflation

b. disinflation; deflation

A key to supporting the Friedman and Phelps hypothesis regarding the short-run and long-run relationships between inflation and unemployment was the role of ____ a. structural unemployment. b. expected inflation. c. aggregate demand. d. frictional unemployment.

b. expected inflation.

Other things the same, a country that decides to increase inflation will a. not have a lower unemployment rate in either the short run or the long run. b. have a lower unemployment rate only in the short run. c. have a lower unemployment rate only in the long run. d. have a lower unemployment rate in the short run and the long run.

b. have a lower unemployment rate only in the short run.

Samuelson and Solow argued that there is downward pressure on wages and prices when unemployment is a. unmeasurable. b. high. c. low. d. constant.

b. high.

Policymakers prefer both low inflation and low unemployment. The historical data summarized by the Phillips curve indicate that this combination of: a. unable to be predicted because of contradictory data. b. impossible. c. possible, but with a low probability. d. possible, and with a high probability.

b. impossible.

The Federal Reserve might move unemployment lower in the short run but not the long run by ________ the rate at which it increases the money supply. a. decreasing b. increasing c. not changing d. There is no relationship between the rate at which the Federal Reserve increases the money supply and unemployment.

b. increasing

In the long run, a decrease in the money supply a. raises prices and leaves unemployment unchanged. b. lowers prices and leaves unemployment unchanged. c. leaves prices and unemployment unchanged. d. leaves prices unchanged and raises unemployment.

b. lowers prices and leaves unemployment unchanged.

If expected inflation decreases, which of the following shifts right? a. the short-run but not the long-run Phillips curve b. neither the long-run nor the short-run Phillips curve c. both the short-run and the long-run Phillips curves d. the long-run but not the short-run Phillips curve

b. neither the long-run nor the short-run Phillips curve

In which case, if any, will inflation not remain higher after a temporary adverse supply shock? a. only if the central bank maintains a higher money supply growth rate b. only if the central bank does nothing c. Whether the central bank maintains a higher money supply growth rate or not, the inflation rate will return to its original level. d. both when the central bank maintains a higher money supply growth rate and when the central bank does nothing

b. only if the central bank does nothing

Because people might adjust their expectations quickly if they found anti-inflation policy credible, the sacrifice ratio could be low according to proponents of a. globalism. b. rational expectations. c. consumer choice. d. Keynesianism.

b. rational expectations.

There is a temporary favorable supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would a. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. b. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. c. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. d. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right.

b. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.

Which of the following did not occur in the housing and financial crisis? a. reduction in the rate of inflation b. shift of the long-run Phillips curve to the left c. steep increase in unemployment d. moving to the right along the short-run Phillips curve

b. shift of the long-run Phillips curve to the left

According to the Phillips curve, in the short run, if policymakers choose an expansionary policy to lower the rate of unemployment, a. the economy will experience a decrease in inflation. b. the economy will experience an increase in inflation. c. inflation will be unaffected if price expectations are unchanging. d. none of the above is true.

b. the economy will experience an increase in inflation.

According to the short-run Phillips curve, inflation a. would fall and unemployment would rise if policymakers increased the money supply. b. would rise and unemployment would fall if policymakers increased the money supply. c. and unemployment would fall if the policymakers decreased the money supply. d. and unemployment would fall if the policymakers increased the money supply.

b. would rise and unemployment would fall if policymakers increased the money supply.

Over the course of 2 years, if a central bank reduced inflation by 4 percentage points and that made output fall by 2 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is a.2 b.1 c.3 d.4

b.1

Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is a.12. b.3. c.2. d.5.

b.3.

Which of the following scenarios is consistent with typical estimates of the sacrifice ratio? a. Inflation is reduced from 7 percent to 4 percent, and annual output falls by 8 percent. b. Inflation is reduced from 3 percent to 2 percent, and annual output falls by 3 percent. c. Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent. d. Inflation is reduced from 4 percent to 1 percent, and annual output falls by 10 percent.

c. Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent.

Samuelson and Solow believed that policymakers could find a menu of possible economic outcomes from which to choose by using the ________ curve. a. aggregate-demand b. long-run aggregate-supply c. Phillips d. Keynesian

c. Phillips

In 2001, Congress and President Bush instituted a change in tax policy. According to the short-run Phillips curve, this change should have raised inflation and reduced unemployment. The change in tax policy must have been a. an increase of more than 3 percent. b. an increase of less than 1 percent. c. a cut. d. several changes that resulted in no net change.

c. a cut.

Which of the following would shift the long-run Phillips curve left? a. an increase in the minimum wage b. an increase in the natural rate of unemployment c. a decrease in the natural rate of unemployment d. a decrease in job-training programs

c. a decrease in the natural rate of unemployment

Along a short-run Phillips curve, a. a higher rate of growth in output is associated with a higher 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 lower unemployment rate. d. a higher rate of inflation is associated with a higher unemployment rate.

c. a higher rate of inflation is associated with a lower unemployment rate.

If the sacrifice ratio is five, a reduction in inflation from 7 percent to 3 percent would require a. a reduction in output of 5 percent. b. a reduction in output of 15 percent. c. a reduction in output of 20 percent. d. a reduction in output of 35 percent.

c. a reduction in output of 20 percent.

For much of the 1960s, data for the United States traced out a(n) a. vertical long-run Phillips curve. b. almost perfect upward-sloping Phillips curve. c. almost perfect downward-sloping Phillips curve. d. horizontal long-run Phillips curve

c. almost perfect downward-sloping Phillips curve.

If money were not neutral and the long-run Phillips curve sloped downward, then a. a decrease in inflation would permanently reduce unemployment. b. an increase in inflation would permanently increase unemployment. c. an increase in inflation would permanently reduce unemployment. d. an increase in inflation would permanently have no effect on unemployment.

c. an increase in inflation would permanently reduce unemployment.

If there is an adverse supply shock and the Federal Reserve takes action that raises inflation but lowers unemployment in the short run, the action must have been a. a small decrease in the growth rate of the money supply. b. no change in the growth rate of the money supply. c. an increase in the growth rate of the money supply. d. a substantial decrease in the growth rate of the money supply.

c. an increase in the growth rate of the money supply.

Which of the following policies increases inflation and shifts the short-run Phillips curve right? a. a constant money supply growth rate b. a decrease in the money supply growth rate c. an increase in the money supply growth rate d. There is no relationship between the money supply growth rate and the short-run Phillips curve.

c. an increase in the money supply growth rate

If the Fed 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 the above.

c. an increase in the rate of inflation

Suppose that the money supply increases. In the short run, this increases prices according to a. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model. b. the short-run Phillips curve but not according to the aggregate demand and aggregate supply model. c. both the short-run Phillips curve and the aggregate demand and aggregate supply model. d. the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.

c. both the short-run Phillips curve and the aggregate demand and aggregate supply model.

According to ________ macroeconomic theory, in the long run monetary growth affects nominal but not real variables. a. modern b. Keynesian c. classical d. nominal

c. classical

If the sacrifice ratio is 2, reducing the inflation rate from 3 percent to 1 percent would a. imply that unemployment would rise by 1%. b. imply that unemployment would rise by 4%. c. cost 4 percent of annual output. d. cost 1 percent of annual output.

c. cost 4 percent of annual output.

A rightward shift in short-run aggregate supply results from a(n) a. adverse supply shock. b. favorable demand shock. c. favorable supply shock. d. adverse demand shock.

c. favorable supply shock.

The natural-rate hypothesis argues that a. unemployment is always equal to the natural rate. b. unemployment is always below the natural rate. c. in the long run, the unemployment rate returns to the natural rate, regardless of inflation. d. unemployment is always above the natural rate.

c. in the long run, the unemployment rate returns to the natural rate, regardless of inflation.

An adverse supply shock a. reduces unemployment and the inflation rate. b. raises unemployment and reduces the inflation rate. c. raises unemployment and the inflation rate. d. reduces unemployment and raises the inflation rate.

c. raises unemployment and the inflation rate.

Unemployment is higher and inflation is lower as the aggregate-demand curve ________ a given aggregate supply curve. a. does not intersect b. shifts rightward along c. shifts leftward along d. stays fixed along

c. shifts leftward along

A decrease in the price of foreign oil a. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is less favorable. b. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is more favorable. c. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable. d. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable.

c. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable.

Which of the following periods of U.S. economic history featured the short-run Phillips curve shifting to the left, but not the long-run Phillips curve? a. the 1970s supply shocks b. the Great Depression c. the Volcker disinflation d. the financial crisis of 2008-2009

c. the Volcker disinflation

It is unanticipated inflation, not inflation per se, that causes a. the long-run Phillips curve to shift to the left. b. a change in the natural rate of unemployment. c. the change in unemployment associated with a change in inflation. d. the shape of the long-run aggregate supply curve.

c. the change in unemployment associated with a change in inflation.

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 Dow Jones Industrial Average and the federal funds rate. c. the sum of the unemployment rate and the inflation rate. d. the sum of the natural rate of unemployment and the actual rate of unemployment.

c. the sum of the unemployment rate and the inflation rate.

According to Friedman and Phelps, when actual inflation is less than expected inflation, the a. unemployment rate is equal to the natural rate. b. unemployment rate is below the natural rate. c. unemployment rate is above the natural rate. d. The actual inflation cannot ever be less than expected inflation.

c. unemployment rate is above the natural rate.

In what year did economist A. W. Phillips publish his famous article that showed a negative correlation between the rate of unemployment and the rate of inflation? a.1957 b.1861 c.1958 d.1936

c.1958

If a central bank reduces inflation 2 percentage points and this makes output fall 5 percentage points and unemployment rise 3 percentage points for one year, the sacrifice ratio is a.2/3. b.2/5. c.5/2. d.3/2.

c.5/2.

Which of the following would cause a move to the right along the short-run Phillips curve? a. The federal government uses labor-market policies to decrease the natural rate of unemployment. b. The federal government uses labor-market policies to increase the natural rate of unemployment. c. The central bank pursues an unexpectedly easy monetary policy. d. The central bank pursues an unexpectedly tight monetary policy.

d. The central bank pursues an unexpectedly tight monetary policy.

Which of the following is correct? a. Events that shift the long-run Phillips curve right also shift the long-run aggregate-supply curve right. b. The decrease in output associated with reducing inflation is more if the policy change is announced ahead of time and is credible. c. In the long run, policymakers face a trade off between inflation and unemployment. d. Unemployment can be changed by the use of government policy, but other sources of change are possible.

d. Unemployment can be changed by the use of government policy, but other sources of change are possible.

Unemployment would increase and prices would decrease if a. aggregate supply shifts left. b. aggregate supply shifts right. c. aggregate demand shifts right. d. aggregate demand shifts left.

d. aggregate demand shifts left.

If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should a. increase the money supply growth rate which reduces the unemployment rate. b. increase the money supply growth rate which raises the unemployment rate. c. decrease the money supply growth rate which reduces the unemployment rate. d. decrease the money supply growth rate which raises the unemployment rate.

d. decrease the money supply growth rate which raises the unemployment rate.

When aggregate demand shifts leftward along the short-run aggregate-supply curve, inflation a. decreases and unemployment decreases. b. increases and unemployment decreases. c. increases and unemployment increases. d. decreases and unemployment increases.

d. decreases and unemployment increases.

A reduction in the rate of inflation is a. reinflation. b. exflation. c. deflation. d. disinflation.

d. disinflation.

Output fell, but by less than the typical estimate of the sacrifice ratio suggested, during the Volcker a. disruption. b. default. c. deflation. d. disinflation.

d. disinflation.

The central bank would decrease the money supply to counter rising output in response to a(n) a. adverse demand shock. b. favorable demand shock. c. adverse supply shock. d. favorable supply shock.

d. favorable supply shock.

Prime Minister Emma Bigshot urges passage of a bill to increase unemployment benefits to very generous levels in her country. She also urges her country's central bank to raise the rate at which the money supply is increasing. In the long run which, if either, of these policies will increase the unemployment rate? a. neither increasing the generosity of unemployment benefits nor raising the rate at which the money supply is increasing b. raising the rate at which the money supply is increasing, but not increasing the generosity of unemployment benefits c. both increasing the generosity of unemployment benefits and raising the rate at which the money supply is increasing d. increasing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing

d. increasing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing

If the unemployment rate is above the natural rate, then a. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right. b. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left. c. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right. d. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left.

d. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left.

If inflation expectations fall, the short-run Phillips curve shifts a. right. If inflation remains the same, unemployment falls. b. right. If inflation remains the same, unemployment rises. c. left. If inflation remains the same, unemployment rises. d. left. If inflation remains the same, unemployment falls.

d. left. If inflation remains the same, unemployment falls.

Monetary policy cannot change the natural rate of unemployment, but other government policies can. To which of the following curves does this statement apply? a. short-run Phillips b. short-run aggregate-supply c. aggregate-demand d. long-run Phillips

d. long-run Phillips

Favorable supply shocks that shifted the short-run Phillips curve left and kept both inflation and unemployment low occurred in the a.1980s. b.1930s. c.1970s. d. mid and last part of the 1990s.

d. mid and last part of the 1990s.

The sacrifice ratio could be as small as zero according to proponents of a. supply shock expectations theory. b. zero expectations theory. c. rational sacrifice theory. d. rational expectations theory.

d. rational expectations theory.

According to the Phillips curve, if policymakers contract aggregate demand, they can ________ inflation and ________ unemployment. a. raise; reduce b. raise; raise c. reduce; reduce d. reduce; raise

d. reduce; raise

An increase in expected inflation a. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable. b. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is more favorable. c. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is less favorable. d. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable

d. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable

The economy will move to a point on the short-run Phillips curve where unemployment is lower if a. the government raises taxes. b. the Fed decreases the money supply. c. the government cuts its expenditures. d. the inflation rate increases

d. the inflation rate increases

If there is a decrease in the price of oil, then a. unemployment rises. If the central bank tries to counter this increase, inflation falls. b. unemployment rises. If the central bank tries to counter this increase, inflation rises. c. unemployment falls. If the central bank tries to counter this decrease, inflation rises. d. unemployment falls. If the central bank tries to counter this decrease, inflation falls.

d. unemployment falls. If the central bank tries to counter this decrease, inflation falls.

When actual inflation exceeds expected inflation, a. unemployment is equal to the natural rate of unemployment. b. unemployment is greater than the natural rate of unemployment. c. people will reduce their expectations of inflation in the future. d. unemployment is less than the natural rate of unemployment.

d. unemployment is less than the natural rate of unemployment.

In the United States, expected inflation rose substantially during the a.1930s. b.1870s. c.1960s. d.1970s.

d.1970s.

-Reduction in the rate of inflation

disinflation

A given short-run Phillips curve shows that a decrease in the inflation rate will be accompanied by a lower unemployment rate in the short run. True False

false

Long-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation. True False

false

The long-run Phillips curve is not consistent with monetary neutrality implied by the classical dichotomy. True False

false

The proliferation of Internet usage serves as an example of an adverse supply shock. True False

false

the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

natural-rate hypothesis

If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products, then a decrease in the money supply growth rate would have at most a very short-lived effect on unemployment. True False

true

The sacrifice ratio of the Volcker disinflation was smaller than previous estimates had predicted. True False

true

If output rises and unemployment falls, the central bank must have done what to the money supply? a. increased b. decreased by less than a factor of two c. decreased by more than a factor of five d. made no change

a. increased

An increase in inflation expectations shifts the short-run Phillips curve right while the long-run Phillips curve a. is not affected. b. shifts to the right. c. shifts to the right and then shifts back to the left. d. shifts to the left.

a. is not affected.

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. has a slope that is determined by how fast people adjust their price expectations. c. is negatively sloped. d. is positively sloped.

a. is vertical.

The U.S. economy had an inflation rate of more than 9 percent and an unemployment rate of about 7 percent in a.1980. b.1970. c.1950. d.1960

a.1980.

Over the course of 2 years, if the central bank reduced inflation by 1 percentage point and that made output fall by 2 percentage points each year and the unemployment rate rise from 3 percent to 5 percent, the sacrifice ratio is a.4 b.5 c.3 d.2

a.4

Long-run aggregate-supply curve shifts

right

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future

rational expectations

A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift left. True False

true

A decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left. True False

true

A low sacrifice ratio would make a central bank more willing to reduce the inflation rate. True False

true

a curve that shows the short-run trade-off between inflation and unemployment

Phillips curve

Which of the following is an example of an adverse supply shock? a. a worldwide blight that damages grain crops b. an increase in the money supply c. decreased government spending d. a tax cut

a. a worldwide blight that damages grain crops

the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point

sacrifice ratio

A negative correlation between wage inflation and unemployment was found by economist a. A. W. Phillips. b. John M. Keynes. c. Adam Smith. d. Milton Friedman.

a. A. W. Phillips.

-Between inflation and unemployment

Phillips curve

___ percent of annual output must be sacrificed in the transition

5

An increase in government expenditures serves as an example of an adverse supply shock. True False

false

Long-run Phillips curve shifts

left

-Used to gauge the health of the economy

misery index

an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve

supply shock

Fiscal policy can be used to move the economy along the short-run Phillips curve. True False

true

•The long-run Phillips curve is

vertical

-Affect the natural rate of unemployment

•Labor-market policies

-Shows the short-run trade-off

•Phillips curve

-Number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point

•Sacrifice ratio

In the equation for the short-run Phillips curve, the parameter that measures how much actual unemployment responds to unexpected inflation is a. x b. u c. y d. a

d. a

reduction in the price level

deflation