Econ Ch 17 study guide

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action will raise inflation and lower unemployment.

True

In a famous article published in 1958, A.W. Phillips used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

True

In the long run, the inflation rate depends primarily on the growth rate of the money supply.

True

Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.

True

The classical notion of monetary neutrality is consistent both with a vertical long-run aggregate-supply curve and with a vertical long-run Phillips curve.

True

An economy has a current inflation rate of 7%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, then how much annual output must be sacrificed in the transition? (C)

a. 10% b. 8% c. 6% d. None of the above is correct.

Which of the following is an example of an adverse supply shock? (C)

a. a decrease in the money supply b. a tax cut c. a worldwide drought d. decreased government spending

A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is (D)

a. consistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would not increase inflation. b. consistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would increase inflation. c. inconsistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would not increase inflation. d. inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is (C)

a. downward-sloping, which implies that monetary and fiscal policies can influence the level of unemployment in the long run. b. downward-sloping, which implies that monetary and fiscal policies cannot influence the rate of inflation in the long run. c. vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run. d. vertical, which implies that monetary and fiscal policies cannot influence the rate of inflation in the long run.

According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is. (B)

a. higher in the short-run and the long-run. b. higher in the short-run only. c. lower in the short-run and the long-run. d. lower in the short-run only.

According to the Phillips curve, policymakers could reduce both inflation and unemployment by (D)

a. increasing the money supply. b. increasing government expenditures. c. raising taxes. d. None of the above is correct.

As aggregate demand shifts left along the short-run aggregate supply curve, (C)

a. inflation and unemployment are higher. b. inflation is higher and unemployment is lower. c. unemployment is higher and inflation is lower. d. unemployment and inflation are lower.

A.W. Phillips found a (D)

a. positive relation between unemployment and inflation in the United Kingdom. b. positive relation between unemployment and inflation in the United States. c. negative relation between unemployment and inflation in the United States. d. negative relation between unemployment and inflation in the United Kingdom

An increase in expected inflation shifts the (A)

a. short-run Phillips curve right. b. short-run Phillips curve left. c. long-run Phillips curve right. d. long-run Phillips curve left.

Which of the following played a role in depressing aggregate demand in 2001? (D)

a. the end of a stock-market bubble b. corporate accounting scandals c. the terrorist attacks on September 11 of that year d. All of the above are correct.

If people believe that the central bank is going to reduce inflation, then (D)

a. the short-run Phillips curve shifts right and the sacrifice ratio will rise. b. the short-run Phillips curve shifts right and the sacrifice ratio will fall. c. the short-run Phillips curve shifts left and the sacrifice ratio will rise. d. the short-run Phillips curve shifts left and the sacrifice ratio will fall.

The long-run response to an increase in the growth rate of the money supply is shown by shifting (D)

a. the short-run and long-run Phillips curves left. b. the short-run and long-run Phillips curves right. c. only the short-run Phillips curve left. d. only the short-run Phillips curve right.

In the late 1960s, Milton Friedman and Edmund Phelps argued that (A)

a. the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run. b. the trade-off between inflation and unemployment did not apply in the long run. This claim is inconsistent with monetary neutrality in the long run. c. the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is consistent with monetary neutrality in the long run. d. the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is inconsistent with monetary neutrality in the long run.

In the late 1960s, Milton Friedman and Edmund Phelps argued that (a)

a. the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run. b. the trade-off between inflation and unemployment did not apply in the long run. This claim is inconsistent with monetary neutrality in the long run. c. the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is consistent with monetary neutrality in the long run. d. the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is inconsistent with monetary neutrality in the long run.

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the (B)

a. unemployment rate. b. inflation rate. c. growth rate of real national income. d. All of the above are correct.