Chapter 6

What sort of event could lead to a simultaneous decrease in the rates of inflation and unemployment?

a decrease in material prices

Which of the following is the most likely medium-run outcome of an adverse supply shock?

a decrease in real GDP

For many government decision makers, the original Phillips curve implied

a trade-off between lowering unemployment at the cost of higher inflation or lowering inflation at the cost of higher unemployment

The upward-sloping AS-curve will shift eventually to the left if

actual output is higher than the full-employment level

Robert Lucas modified the rational expectations argument by

allowing for the role of forecasting errors

In the long run, what event(s) can lead to an increase in inflation without changing the unemployment rate above its natural level?

an adverse supply shock accommodated by expansionary monetary policy

The newer view of the Phillips curve implies that

an increase in monetary growth affects unemployment and inflation in the short run, but only affects inflation in the long run

In an AD-AS model with an upward-sloping AS-curve, the most likely effects of fiscal expansion would be

an increase in prices and interest rates, but a decrease in real money balances

If the government stimulates aggregate demand in response to an adverse supply shock,

an increase in unemployment can be avoided but only at the cost of increased inflation

In the long run, real money balances

are not affected by restrictive monetary policy, but increase if restrictive fiscal policy is employed

Stagflation, that is, high unemployment combined with high inflation

cannot persist, since the economy eventually will return to full employment

In the long run, an increase in nominal money supply will

cause both the nominal wage rate and the price level to rise proportionately, leaving the real wage rate and output unchanged

In the AD-AS model with an upward-sloping AS-curve, a decrease in oil prices will

decrease prices and increase output

The theory of aggregate supply is one of the most controversial in macroeconomics because

economists do not completely agree on the reasons for the slow adjustment of wages and prices after demand-side disturbances

In the medium run, a price increase combined with a decrease in the unemployment rate is most likely the result of

expansionary fiscal or monetary policy

Which of the following event(s) most likely will leave prices relatively unchanged while increasing output?

expansionary fiscal policy employed after a favorable supply shock

The coordination approach to the Phillips curve focuses on the fact that

firms are unsure about their competitors' behavior and are therefore reluctant to change wages and prices following a change in aggregate demand

Wages are considered to be sticky rather than flexible since

firms are unsure about their competitors' behavior and only reluctantly change prices and wages following a change in aggregate demand

In the medium run the aggregate supply curve is upward sloping since

firms encounter costs in resetting prices and are reluctant to change wages following a change in aggregate demand

The fact that nominal wages are fixed by a contract at the beginning of a period while prices of goods may change within that period, implies that

firms want to supply more output when prices increase since the real wage rate is lower

If nominal wage rates were completely flexible, then

fiscal policy would affect real money balances but not output

If policy makers want to get the price level quickly back to its original level following an adverse supply shock, they need to

implement restrictive monetary policy

Assume the economy is at full employment and the Fed restricts money supply. What will be the effects on output and prices?

in the medium run output and prices will both decrease, but in the long run output will remain the same, while prices will decrease

In the 1990s, the consumer price index

increased slightly despite a drastic decrease in computer prices

The most likely long-run result of a tax cut would be

more consumption and less investment, with output remaining unchanged

Assume the economy is at full employment. Which is the most likely effect of a decrease in government spending?

prices and interest rates will decrease in the medium and long run while output will be negatively affected in the medium run but not in the long run

The Phillips curve shows a relationship between

rate of change in prices and the rate of unemployment

Okun's law states that one extra percentage point in unemployment causes

real GDP to fall by about 2 percent

Suppose an increase in oil prices is accompanied by a decline in the level of potential output. Which of the following is the most likely long-run effect?

real GDP will decrease but prices will increase

In an AD-AS model with an upward sloping AS-curve, what would happen if oil prices increased and the Fed responded by restricting money supply?

real output would decrease but we can't tell what would happen to the price level

In the static AD-AS model, what is the most likely long-run outcome of an oil price increase, if no policy change is implemented?

real wages will decline while the levels of output and prices will remain unchanged

If we look at the annual U.S. unemployment rates over the last three decades, we see

that the unemployment rate exceeded 10% in 1982

The inverse relationship between inflation and unemployment is called

the Phillips curve

Which of the following is NOT true?

the Phillips curve shifts as soon as actual inflation changes

Assume the Fed implements restrictive monetary policy. Which of the following is the most likely result in an AD-AS framework with an upward sloping AS-curve?

the interest rate will increase but output, prices, and real money balances will fall

Which of the following is NOT used in deriving the AS-curve in Chapter 6?

the quantity theory of money

The natural rate of unemployment is

the result of labor market friction--people entering the labor force, changing careers, etc.

Restrictive monetary policy will eventually affect the upward-sloping AS-curve since

the resulting unemployment will cause downward pressure on nominal wages, so the cost of production will decrease

The inflation-expectations-augmented Phillips curve implies that

unemployment is at its natural rate when expected inflation is equal to actual inflation

Assume the economy is at full employment. If the Fed accommodates an increase in oil prices by expansionary monetary policy, what will be the long-run effects on unemployment and prices?

unemployment will remain the same but prices would increase

Friedman and Phelps argued that the Phillips curve is not stable over time because

workers' expectations about price changes are only wrong temporarily

The unemployment gap

-always grows twice as fast as the output gap -always is negative -always increases as the rate of inflation increases -always stays at its natural level E)none of the above

The rational expectations hypothesis predicts that

-anncd change in monetary policy will not affect the unemployment rate -sht-run Phillips curve will shift as soon as new info about future infl becomes available -level of output will not be affected by any predictable change in mntry plcy D)all

A difference between the inflation-expectations-augmented Phillips curve and the Phillips curve that is based on rational expectations is that

-in lttr pple never make incorrect forecasts -in lttr mntry plcy chng cant affect rate of infl -in frmr change in monetary policy causes an immediate shift in Phillips curve -in frmr expctd infl is always equal to actual infl E)none of the above

Assume output is at its full-employment level and the Fed restricts money supply. What is the most likely outcome?

-no change in nominal wages in the short run, but a decline in output and prices in the medium run -a decrease in nominal wages and prices in proportion to money supply, but no change in output and real interest rates in the long run

In the long run, monetary expansion should have the following result:

-nominal wages change in proportion to nominal money supply -real interest rates remain constant -real wages remain constant -nominal wages and prices change in proportion to nominal money supply E)all of the above

When we look at the real (inflation adjusted) price of crude oil over the last four decades, we realize that

-oil prices doubled between 1971 and 1974 -oil prices did not change much between 1974 and 1978 -oil prices more than doubled between 1978 and 1981 -oil prices were lower in 1998 than in 1978 E)all of the above

The efficiency wage theory of aggregate supply implies that

-the AS-curve is vertical -paying emply higher wages won't induce them to work harder -even unanticipated changes in monetary or fiscal policy have no effect on the level of output E)none

The insider-outsider model refers to

-the fact that the unemployed do not take part in collective bargaining -the fact that wages do not respond significantly to changes in the unemployment rate

According to the Phillips curve relationship, if unemployment is at the natural rate, then

-the rate of inflation is zero -nominal wages will always be equal to real wages -the labor supply will be totally price elastic -prices will always immediately adjust to changes in money supply E)none of the above