Deck 15: The Short-Run Policy Tradeoff

Question 1

If the natural unemployment rate decreases, then the short-run Phillips curve
_{--------------------}and the long-run Phillips curve _{--------------------} .

A)shifts rightward; shifts leftward
B)shifts leftward; shifts leftward
C)shifts rightward; shifts rightward
D)shifts leftward; does not shift
E)does not shift; shifts leftward

Answer 1

shifts leftward; shifts leftward

Question 2

In the long run, the unemployment rate

A)is zero.
B)must be equal to the expected inflation rate.
C)can take on any value.
D)is equal to the natural unemployment rate.
E)is equal to the expected unemployment rate.

Answer 2

D

Question 3

The lack of a long-run tradeoff between the unemployment rate and the inflation rate means that

A)only monetary policy is effective to lower the natural unemployment rate.
B)the natural unemployment rate cannot change.
C)only fiscal policy is effective to lower the natural unemployment rate.
D)an increase in the inflation rate would not bring a reduction in the natural unemployment rate.
E)only a decrease in the inflation rate would bring a reduction in the natural unemployment rate.

Answer 3

D

Question 4

In the long run, the inflation rate

A)cannot be negative.
B)is equal to the natural inflation rate.
C)can take on any value.
D)is zero.
E)must be equal to the natural unemployment rate.

Question 5

In the short run, a decrease in aggregate demand will lead to

A)no change in the price level and a decrease in real GDP.
B)a decrease in the price level and an increase in real GDP.
C)an increase in the price level and an increase in real GDP.
D)an increase in the price level and a decrease in real GDP.
E)a decrease in the price level and an increase in the unemployment rate.

Question 6

The natural unemployment rate

A)never changes.
B)always increases.
C)increases when the expected inflation rate rises.
D)decreases when the inflation rate rises.
E)increases when job search increases.

Question 7

The short-run Phillips curve shows the relationship between the

A)inflation rate and the nominal interest rate.
B)natural unemployment rate and the expected inflation rate.
C)inflation rate and the unemployment rate.
D)expected inflation rate and the unemployment rate.
E)natural unemployment rate and the real interest rate.

Question 8

If the Fed raises the inflation rate and initially expected inflation does not change, in the short run the unemployment rate _{--------------------}the natural unemployment rate and in the long run the unemployment rate _{--------------------} the natural unemployment rate.

A)is larger than; equals
B)is less than; is larger than
C)is larger than; is larger than
D)is less than; is less than
E)is less than; equals

Question 9

_{--------------------}is fixed when moving along the aggregate supply curve.

A)The real wage rate
B)The money wage rate
C)The price level
D)Real GDP
E)Employment

Question 10

The short-run Phillips curve shifts from SRPC0 to SRPC1 as a result of

A)a fall in the expected inflation rate.
B)a decrease in the natural unemployment rate.
C)an increase in the natural unemployment rate.
D)a rise in the expected inflation rate.
E)None of the above answers are correct.

Question 11

If the economy is at full employment, then the inflation rate

A)is equal to zero.
B)exceeds the expected inflation rate.
C)can be anywhere on a short-run Phillips curve.
D)is equal to the expected inflation rate.
E)is less than the expected inflation rate.

Question 12

The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the economy is

A)away from potential GDP.
B)at full inflation.
C)at full employment.
D)in expansion.
E)in recession.

Question 13

When the natural unemployment rate increases, the short-run Phillips curve_{--------------------} and the long-run Phillips curve _{--------------------} .

A)shifts rightward; shifts rightward
B)does not shift; shifts leftward
C)shifts leftward; does not shift
D)shifts leftward; shifts rightward
E)shifts rightward; does not shift

Question 14

The shifts of the short-run and long-run Phillips curves in the figure above are the result of

A)an increase in the actual inflation rate.
B)an increase in the expected inflation rate.
C)a decrease in the expected inflation rate.
D)an increase in the natural unemployment rate.
E)a decrease in the natural unemployment rate.

Question 15

$\begin{array} { c c } \hline \begin{array} { c } \text { Price level } \\( \mathbf { 2 0 0 5 } = \mathbf { 1 0 0 ) }\end{array} & \begin{array} { c } \text { Unemployment rate } \\\text { (percentage) }\end{array} \\\hline 102 & 7 \\103 & 6 \\105 & 5 \\108 & 4 \\112 & 3 \\\hline\end{array}$

Based on the above table, if the current price level is 100 and the unemployment rate is 4 percent,
Then the

A)inflation rate is 2.8 percent.
B)inflation rate is 108 percent.
C)expected inflation rate is 8 percent.
D)inflation rate is 8 percent.
E)expected inflation rate is 2.8 percent.

Question 16

-
Along the short-run Phillips curve SRPC0 the natural unemployment rate is

A)3 percent.
B)6 percent.
C)8 percent.
D)4 percent.
E)an amount that can be determined from the figure but none of the above answers are correct.

Question 17

Burger King is paying $9 an hour to its workers. If the expected inflation rate equals the actual
Inflation rate and both are 10 percent a year, then to keep the real wage rate constant in a year the
Money wage rate must

A)rise to $10.00 an hour.
B)fall to $8.10 an hour.
C)rise to $9.45 an hour.
D)stay at $9.00 an hour.
E)rise to $9.90 an hour.

Question 18

The curve shown in the figure above is the

A)potential GDP curve.
B)aggregate demand curve.
C)aggregate supply curve.
D)Phillips curve.
E)demand for money curve.

Question 19

Okun's Law states that for each percentage point that the unemployment rate is above its natural rate, there is a _{--------------------} percent gap between real GDP and potential GDP.

A)8
B)2
C)4
D)6
E)random

Question 20

A major factor in determining the rational expectation of inflation is

A)forecasts of fiscal policy.
B)the size of the budget deficit.
C)the recent past behavior of the stock market.
D)the previous month's unemployment rate.
E)forecasts of the Fed's monetary policy.

Question 21

An increase in the expected inflation rate

A)shifts the long-run Phillips curve upward.
B)shifts the short-run Phillips curve upward.
C)leads to a movement downward along the short-run Phillips curve.
D)leads to a movement upward along the short-run Phillips curve.
E)shifts the short-run Phillips curve downward.

Question 22

If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

A)2.0 percent.
B)0.02 percent.
C)100 percent.
D)102 percent.
E)unable to be determined without knowing potential GDP.

Question 23

If the expected inflation rate rises, then the short-run Phillips curve
_{--------------------}and the long-run Phillips curve_{--------------------} .

A)does not shift; shifts
B)might shift; shifts only if the short-run Phillips curve shifts
C)does not shift; does not shift
D)shifts; does not shift
E)shifts; shifts

Question 24

The natural rate hypothesis concludes that the inflation rate increases, then in the short run there is

A)a downward movement along the short-run Phillips curve.
B)a downward shift of the short-run Phillips curve.
C)an upward movement along the short-run Phillips curve.
D)an upward shift of the short-run Phillips curve.
E)no change at all in the short-run Phillips curve.

Question 25

Along the long-run Phillips curve the unemployment rate_{--------------------} and the inflation rate_{--------------------}
.

A)is equal to the natural unemployment rate; can be any value
B)can be any value; can be any value
C)can be any value; is equal to the natural inflation rate
D)is equal to the natural unemployment rate; is equal to the natural inflation rate
E)None of the above answers is correct.

Question 26

Comparing the AS-AD model and the Phillips curve, we see that

A)the Phillips curve is graphed as a relationship between the price level and the unemployment rate.
B)the AS-AD model uses the price level and the Phillips curve uses the rate of inflation.
C)the AS-AD model is graphed as a relationship between the inflation rate and the rate of real GDP.
D)the AS-AD model uses the price level and the Phillips curve uses real GDP.
E)they both are graphed as a relationship between the rate of inflation and the unemployment rate.

Question 27

Moving along the short-run Phillips curve, if_{--------------------}increases then _{--------------------} decreases.

A)unemployment; the expected inflation rate
B)inflation; real GDP
C)inflation; unemployment
D)unemployment; the price level
E)inflation; the price level

Question 28

Okun's Law says that the difference between the unemployment rate and the natural unemployment rate determines

A)the gap between the inflation rate and the unemployment rate.
B)real GDP.
C)the real interest rate.
D)the gap between potential GDP and real GDP.
E)potential GDP.

Question 29

If real GDP exceeds potential GDP, then employment is _{--------------------} full employment and the unemployment rate is _{--------------------}the natural unemployment rate.

A)below; above
B)equal to; equal to
C)equal to; below
D)above; above
E)above; below

Question 30

The natural rate hypothesis concludes that when the inflation rate increases, then in the long run there is

A)a downward shift of the short-run Phillips curve.
B)no change at all in the short-run Phillips curve.
C)an upward movement along the short-run Phillips curve.
D)an upward shift of the short-run Phillips curve.
E)a downward movement along the short-run Phillips curve.

Question 31

The short-run Phillips curve is _{--------------------}curve along which an increase in the unemployment rate is associated with _{--------------------}in the inflation rate.

A)an upward sloping; an increase
B)a downward sloping; no change
C)a downward sloping; a decrease
D)a horizontal; no change
E)a vertical; no change

Question 32

According to _{--------------------} , when real GDP is _{--------------------} percentage points greater than potential GDP, the unemployment rate is one percentage point _{--------------------} the natural unemployment rate.

A)Phillip's Law; four; above
B)Say's Law; two; above
C)Okun's Law; four; below
D)Okun's Law; two; below
E)Keynes' Law; two; below

Question 33

If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, before the expected inflation rate changes, the inflation rate _{--------------------}and the unemployment rate_{--------------------}
.

A)rises; falls
B)falls; rises
C)rises; does not change
D)does not change; falls
E)falls; falls

Question 34

Suppose potential GDP is $100 billion and the natural unemployment rate is 5 percent. If the unemployment rate is 6 percent, then according to Okun's Law real GDP is

A)$102 billion.
B)$98 billion.
C)$100 billion.
D)$101 billion.
E)$99 billion.

Question 35

The long-run Phillips curve is the relationship between

A)unemployment and the inflation rate at the expected price level.
B)inflation and real GDP at full employment.
C)inflation and the expected inflation rate.
D)inflation and unemployment when the economy is at full employment.
E)unemployment and the price level at full employment.

Question 36

Changes in which of the following do NOT affect the natural unemployment rate?

A)unemployment benefits
B)structural change
C)the birth rate or other demographic data
D)the minimum wage
E)the quantity of money

Question 37

When an economy experiences a recession there is

A)a leftward shift of the short-run Phillips curve.
B)a downward movement along the short-run Phillips curve.
C)an upward movement along the short-run Phillips curve.
D)a rightward shift of the short-run Phillips curve.
E)no change in the short-run Phillips curve.

Question 38

Moving along the short-run Phillips curve, as the unemployment rate increases the inflation rate

A)decreases.
B)initially increases and then decreases.
C)remains unchanged.
D)increases.
E)initially decreases and then increases.

Question 39

The natural rate hypothesis concludes that when the inflation rate _{--------------------} unexpectedly increases, the unemployment rate . But when the higher inflation rate becomes the expected inflation rate, the unemployment rate then _{--------------------}until it reaches the _{--------------------} unemployment rate.

A)decreases; increases; natural
B)decreases; increases; maximum
C)decreases; decreases; natural
D)increases; decreases; natural
E)increases; decreases; minimum

Question 40

The expected inflation rate is the inflation rate that people forecast and use to help set

A)the real wage rate.
B)the money wage rate.
C)the natural rate of unemployment.
D)the price level.
E)real GDP.

Question 41

The short-run Phillips curve is downward sloping because

A)the expected inflation rate is zero in the short run.
B)reducing the unemployment rate will reduce the inflation rate in the short run.
C)the unemployment rate can be above or below the natural unemployment rate.
D)in the long run, the expected inflation rate equals the actual inflation rate.
E)the economy always returns to full employment.

Question 42

When the aggregate demand curve shifts rightward, the price level_{--------------------}and the unemployment rate_{--------------------} .

A)does not change; does not change
B)decreases; decreases
C)increases; increases
D)decreases; increases
E)increases; decreases

Question 43

The short-run Phillips curve shows only a short-run tradeoff between the unemployment rate and the inflation rate because in the long run the

A)expected inflation rate increases.
B)natural unemployment rate increases.
C)inflation rate returns to the natural inflation rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate.
D)unemployment rate returns to the natural unemployment rate and so there is no long-run tradeoff between the inflation rate and the unemployment rate.
E)inflation rate returns to the natural inflation rate and the unemployment rate returns to the natural unemployment rate.

Question 44

The long-run Phillips curve shows the relationship between the_{--------------------} and the _{--------------------}when there is no_{--------------------} unemployment.

A)nominal interest rate; real interest rate; frictional
B)inflation rate; unemployment rate; cyclical
C)nominal interest rate; unemployment rate; cyclical
D)inflation rate; unemployment rate; structural
E)inflation rate; employment rate; seasonal

Question 45

The expected inflation rate is the

A)same as the actual inflation rate.
B)rate that people expect the Bureau of Labor Statistics to announce each month, on which bookies take bets.
C)inflation rate that the Federal Reserve system announces as the policy goal for the year.
D)inter-annual, non-energy inflation rate.
E)inflation rate that people forecast and use to set the money wage and other money prices.

Question 46

The lack of a long-run tradeoff between the unemployment rate and the inflation rate means the long-run Phillips curve is

A)downward sloping.
B)horizontal.
C)vertical.
D)upward sloping.
E)U-shaped, with higher inflation initially decreasing unemployment and then increasing it back to the natural unemployment rate.

Question 47

According to the natural rate hypothesis, in the short run an increase in the inflation rate brings

A)no change in the unemployment rate.
B)an increase in the natural unemployment rate.
C)a decrease in the unemployment rate.
D)a decrease in the natural unemployment rate.
E)an increase in the unemployment rate.

Question 48

Suppose an economy experiences a permanent increase in its expected inflation rate. As a result, there is

A)a downward movement along the short-run Phillips curve.
B)an upward movement along the short-run Phillips curve.
C)no change at all to the short-run Phillips curve.
D)a downward shift of the short-run Phillips curve.
E)an upward shift of the short-run Phillips curve.

Question 49

Moving_{--------------------}the short-run Phillips curve is equivalent to moving _{--------------------} .

A)downward along; upward along the aggregate demand curve
B)downward along; downward along the potential GDP line
C)upward along; upward along the aggregate supply curve
D)downward along; upward along the potential GDP line
E)downward along; downward along the aggregate demand curve

Question 50

Changes in which of the following shift the short-run Phillips curve?
I. changes in the natural unemployment rate
Ii. changes in the expected inflation rate iii. changes in the inflation rate

A)i only
B)ii only
C)i, ii, and iii
D)i and ii
E)iii only

Question 51

The short-run Phillips curve shows a relationship between the

A)inflation rate and real GDP.
B)inflation rate and the unemployment rate.
C)unemployment rate and the interest rate.
D)price level and real GDP.
E)inflation rate and the interest rate.

Question 52

If the economy moves upward along its short-run Phillips curve, in the AS-AD diagram, this movement is shown by a

A)leftward shift of the AS curve and a movement along the AD curve.
B)rightward shift of the AS curve and a movement along the AD curve.
C)movement upward along the AS curve as a result of a rightward shift of the AD curve.
D)rightward shift of potential GDP.
E)movement downward along the AS curve as a result of a leftward shift of the AD curve.

Question 53

Moving along the short-run Phillips curve, a _{--------------------}unemployment rate can only be achieved by paying the cost of_{--------------------} .

A)lower; a lower inflation rate
B)lower; a higher inflation rate
C)higher; a higher inflation rate
D)lower; a higher expected inflation rate
E)lower; a lower price level

Question 54

In 1981, the Fed

A)took no action so that the inflation rate skyrocketed.
B)publicly announced an inflation reduction policy and created a recession.
C)created an unexpected inflation reduction policy and created an expansion.
D)publicly announced an inflation reduction policy and created an expansion.
E)created an unexpected inflation reduction policy and created a recession.

Question 55

The short-run Phillips curve tradeoff becomes less favorable if either

A)potential GDP or the natural unemployment rate increases.
B)the level of real GDP decreases or the natural unemployment rate decreases.
C)the expected inflation rate or the natural unemployment rate increases.
D)the expected inflation rate increases or the natural unemployment rate decreases.
E)potential GDP or the natural unemployment rate decreases.

Question 56

Comparing the aggregate supply curve and the short-run Phillips curve, we see that they

A)both exist since money wages are flexible.
B)describe the same phenomena but contradict each other.
C)both exist because money wage rate is fixed in the short run.
D)each describe different parts of the economy.
E)both exist because real wage rate is fixed in the short run.

Question 57

Along a short-run Phillips curve, the

A)short-run benefit of lower unemployment is lower inflation.
B)long-run cost of lower inflation is higher unemployment.
C)short-run cost of lower unemployment is higher inflation.
D)short-run cost of higher inflation is a higher real interest rate.
E)short-run cost of lower inflation is higher interest rates.

Question 58

The long-run Phillips curve indicates that

A)potential GDP can never be achieved.
B)any inflation rate is possible at the natural unemployment rate.
C)there is no way to control the inflation rate in the long run.
D)there is a tradeoff between the inflation rate and the unemployment rate in the long-run.
E)any unemployment rate is possible at the natural inflation rate.

Question 59

A country reports that its inflation rate and unemployment rate have both increased. These changes could be the result of

A)a leftward shift of the long-run Phillips curve.
B)a movement upward along the short-run Phillips curve.
C)a downward shift of the short-run Phillips curve.
D)a movement downward along the short-run Phillips curve.
E)an upward shift of the short-run Phillips curve.

Question 60

The short-run Phillips curve presents a tradeoff because a

A)lower unemployment rate can be achieved at the cost of a higher inflation rate.
B)lower unemployment rate can be achieved at the cost of a lower inflation rate.
C)higher unemployment rate can be achieved at the cost of a higher inflation rate.
D)higher price level leads to a lower real GDP.
E)higher inflation leads to a higher nominal interest rate.

Question 61

The natural rate hypothesis states that when the inflation rate _{--------------------} , in the short run the unemployment rate_{--------------------} and in the long run the unemployment rate_{--------------------}.

A)falls, decreases; returns to the natural unemployment rate
B)rises, decreases; returns to the natural unemployment rate
C)falls, decreases; decreases
D)rises, decreases; decreases
E)falls, increases; decreases

Question 62

When people use all the relevant data and principles of economics to forecast inflation, they are making

A)an always accurate forecast.
B)what is called a "data-based forecast."
C)what is called a "rational expectation."
D)a mistake.
E)an exaggerated forecast.

Question 63

When the expected inflation rate_{--------------------}, the short-run Phillips curve_{--------------------}

A)rises; shifts upward
B)rises; shifts downward
C)falls; shifts upward
D)falls; does not shift
E)rises; might shift upward or downward depending on how the long-run Phillips curve shifts

Question 64

-
In the figure above, the shift from the short-run Phillips curve SRPC0 and the long-run Phillips curve LRPC0 to the short-run Phillips curve SRPC2 and the long-run Phillips curve LRPC2 is the result of _{--------------------}in the expected inflation rate and in_{--------------------} the natural unemployment rate.

A)an increase; no change
B)a decrease; an increase
C)no change; a decrease
D)a decrease; a decrease
E)an increase; an increase

Question 65

Along the short-run Phillips curve SRPC0 the natural unemployment rate is

A)7 percent.
B)3 percent.
C)6 percent.
D)an amount that can be determined from the figure, but none of the above answers are correct.
E)an amount that cannot be determined from the figure.

Question 66

In the United States during the late 1990s, the unemployment rate fell from previous years and the inflation rate was lower than in previous years. This set of events is best described by saying that the

A)long-run Phillips curve shifted rightward.
B)economy moved to a lower point on its short-run Phillips curve but the short-run Phillips curve did not shift.
C)short-run Phillips curve shifted downward.
D)short-run Phillips curve shifted upward.
E)economy moved to a higher point on its short-run Phillips curve but the short-run Phillips curve did not shift.

Question 67

If the natural unemployment rate is 5 percent, the actual unemployment rate is 8 percent, and potential GDP is $15 trillion, then according to Okun's Law, real GDP is

A)$13.8 trillion.
B)$15.9 trillion.
C)$14.25 trillion.
D)$14.1 trillion.
E)$13.05 trillion.

Question 68

According to Okun's Law, when the natural employment rate is 6 percent and potential GDP is $10 trillion, then when actual employment is 7 percent, real GDP is

A)$9.9 trillion.
B)$8 trillion.
C)$9.8 trillion.
D)$10.1 trillion.
E)$10.2 trillion.

Question 69

According to the AS-AD model, when real GDP is less than potential GDP the unemployment rate is definitely

A)equal to the natural unemployment rate.
B)falling.
C)rising.
D)less than the natural unemployment rate.
E)greater than the natural unemployment rate.

Question 70

The relationship between the AS-AD model and the Phillips curve points out that as aggregate demand increases, the unemployment rate

A)decreases and the inflation rate rises.
B)increases and the inflation rate rises.
C)decreases and the price level falls.
D)increases and the inflation rate falls.
E)decreases and the inflation rate does not change, only the price level rises.

Question 71

The inflation rate that is used to set the money wage rate and other money prices is the

A)natural inflation rate.
B)expected inflation rate.
C)actual inflation rate.
D)wage inflation rate.
E)cost of living inflation rate.

Question 72

The long-run Phillips curve is graphed as a

A)a straight line with a 45 degree slope.
B)curve that slopes downward to the right.
C)horizontal line at the expected level of inflation.
D)curve that slopes upward to the right.
E)vertical line at the natural unemployment rate.

Question 73

The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is_{--------------------} .

A)horizontal
B)vertical
C)downward sloping
D)upward sloping
E)unnecessary

Question 74

The natural rate hypothesis states that

A)changes in the inflation rate temporarily change the natural unemployment rate.
B)it is natural for the unemployment rate to be less than the natural unemployment rate.
C)only natural economic policies can bring a permanent reduction in the unemployment rate.
D)changes in the inflation rate temporarily change the unemployment rate.
E)it is natural for the unemployment rate to exceed the inflation rate.

Question 75

The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is _{--------------------} which demonstrates that changes in the inflation rate_{--------------------} effect on unemployment.

A)vertical; have an
B)a downward sloping straight line with a 45 degree slope; have an
C)vertical; have no
D)horizontal; have no
E)an upward sloping straight line with a 45 degree slope; have an

Question 76

The short-run Phillips curve shows

A)the natural unemployment rate.
B)a tradeoff between real GDP and unemployment.
C)a tradeoff between the unemployment rate and the inflation rate.
D)the expected inflation rate.
E)potential GDP.

Question 77

Both the long-run and the short-run Phillips curves shift if

A)the expected inflation rate changes.
B)expected real GDP changes.
C)the natural unemployment rate changes.
D)the expected unemployment rate changes.
E)the actual inflation rate changes.

Question 78

The short-run Phillips curve shifts when

A)the expected unemployment rate changes and also when the expected inflation rate changes.
B)the actual inflation rate changes and also when the expected inflation rate changes.
C)the inflation rate increases and also when the unemployment rate decreases.
D)the natural unemployment rate changes and also when the expected inflation rate changes.
E)the actual unemployment rate changes and also when the expected unemployment rate changes.

Question 79

The short-run Phillips curve is a curve that shows the relationship, other things being constant, between _{--------------------} and_{--------------------} .

A)the unemployment rate; real GDP
B)the inflation rate; the nominal interest rate
C)potential GDP; the natural unemployment rate
D)the inflation rate; the unemployment rate
E)the inflation rate; the expected inflation rate

Question 80

If the expected inflation rate changes, the long-run Phillips curve_{--------------------}and the short-run Phillips curve _{--------------------} .

A)does not shift; does not shift
B)does not shift; shifts upward
C)shifts rightward; does not shift
D)shifts rightward; shifts upward
E)shifts rightward; shifts downward