Deck 13: Inflation, Output and Economic Policy

Question 1

The actual GDP for an economy is:

A) the level of output that is produced using only domestic factors of production.
B) the same as the short-run equilibrium GDP.
C) the total value of goods and services in the economy, after adjusting for prices.
D) the level of output that is not determined by prices or wages.

Answer 1

the same as the short-run equilibrium GDP.

Question 2

When an economy is producing at a point on its production possibility frontier:

A) it is not utilizing all the resources available for production.
B) it is producing at its potential GDP.
C) monetary policy needs to be used to bring the economy to full employment.
D) taxes need to be increased to slow the economy.

Answer 2

it is producing at its potential GDP.

Question 3

In the long run, _____ the level of output produced in an economy.

A) the production possibility frontier does not have any impact on
B) the level of in?ation determines
C) nominal wages determine
D) neither price nor wages have any impact on

Answer 3

neither price nor wages have any impact on

Question 4

An economy's potential GDP is de?ned as the level of output:

A) that is produced when all factors of production that are willing to be employed are being used.
B) that is produced when the economy operates at a point under its production possibility
C) that can be produced when all factors of production are employed in equal proportions.
D) that is produced in the economy in the short run.

Question 5

If nominal wages and prices both double, then _____.

A) the real wage will increase
B) the level of employment will remain unchanged
C) ?rms will hire more workers
D) the supply of labour will decrease

Question 6

A rise in in?ationary expectations in the economy will:

A) lead to an increase in labour productivity.
B) shift the short-run Phillips curve upward.
C) lead to a fall in the long-run equilibrium level of GDP.
D) cause workers to negotiate lower nominal wages.

Question 7

What is real wage?

A) The level of wages earned by workers after accounting for taxes.
B) The total wages earned by all the workers in the economy.
C) The wage that could be earned by someone if they moved to a better job.
D) The nominal wage that has been adjusted for in?ation.

Question 8

If the annual real income of an individual is £45,000 and the annual in?ation rate is 3 per cent, compute the nominal income.

A) £45,000
B) £43,689.32
C) £58,500
D) £46,350

Question 9

Which of the following is true of an economy in the long run?

A) The economy operates on its production possibility frontier.
B) The rate of in?ation is expected to be very high.
C) Wage rates increase faster than in?ation rates.
D) There is a high level of unemployment in the economy.

Question 10

According to the short-run Phillips curve, an increase in government spending aimed at reducing unemployment will lead to:

A) an increase in the rate of in?ation.
B) an increase in the level of potential GDP.
C) a government budget surplus.
D) a decline in aggregate demand.

Question 11

The downward slope of the Phillips curve implies that:

A) monetary policy is more appropriate than ?scal policy in controlling in?ation.
B) it is not possible for the economy to achieve full employment.
C) policy makers face a trade-off between unemployment and in?ation.
D) it is possible to maintain high levels of employment at low and stable price levels.

Question 12

Consider an economy that is operating at the intersection of the long-run and short-run Phillips curve. The level of in?ation is 2.5 per cent, while the level of unemployment is 3.8 per cent. This implies that:

A) the economy is operating at a point inside its production possibility frontier.
B) any increase in interest rates at this point will move the economy up along the short-run
C) any increase in aggregate demand at this point will move the economy down along the short-run Phillips curve.
D) the natural rate of unemployment in this economy is 3.8 per cent.

Question 13

In which of the following cases is the output gap zero?

A) When consumer con?dence declines due to bad economic performance.
B) When the economy operates on its production possibility frontier.
C) When unemployment increases due to an increase in real wages.
D) When in?ation in the economy is equal to its target level.

Question 14

According to the Phillips curve analysis, a fall in in?ationary expectations in an economy would:

A) lead to higher nominal wages in the long run.
B) not affect unemployment in the long run.
C) lead to an increase in unemployment in the long run.
D) increase the real wage in the long run.

Question 15

What does the Phillips curve show?

A) The output gap for an economy over a number of years.
B) The relationship between output and interest rates.
C) The relationship between unemployment and in?ation.
D) The growth rate of potential GDP over a period of time.

Question 16

Consider an economy that is both in long-run and short-run equilibrium. Which of the following is likely to cause a positive output gap?

A) An increase in production costs due to an increase in oil prices.
B) A substantial increase in interest rates.
C) Implementation of new technology that increases productivity of existing workers.
D) Introduction of higher income tax rates.

Question 17

The level of GDP associated with the long run is called _____.

A) actual GDP
B) potential GDP
C) surplus GDP
D) de?cit GDP

Question 18

The long-run Phillips curve suggests that:

A) a fall in in?ationary expectations will lead to an increase in nominal wages.
B) there is a trade-off between unemployment and in?ation.
C) unemployment is constant in the long run, irrespective of the rate of in?ation.
D) ?scal policy is an effective tool in increasing the level of employment in the long run.

Question 19

Active ?scal and monetary policy is required to move an economy back to equilibrium when:

A) the pace of adjustment of prices and wages is sluggish.
B) wages and prices are highly ?exible.
C) the long-run aggregate supply curve is upward sloping.
D) the aggregate demand curve is vertical.

Question 20

Consider an economy that is operating at the intersection of the short-run and long run Phillips curves. The level of unemployment is 2.5 per cent while the level of in?ation is 4 per cent. At this point, if speculation about oil price hikes increase in?ationary expectations in this economy, which of the following must happen?

A) The level of unemployment will be higher than 2.5 per cent at the new equilibrium.
B) The short-run Phillips curve will move up and the new level of in?ation will be higher than 4
C) The economy will move up along the short-run Phillips curve, increasing the level of in?ation above 4 per cent.
D) The short-run Phillips curve will move down from its original position.

Question 21

With the discovery of oil or gas in a country, the _____.

A) aggregate demand curve will move to the left
B) the long-run aggregate supply curve will move to the right
C) the short-run aggregate supply curve will move up
D) the aggregate demand curve will become steeper

Question 22

Which of the following is true of de?ation?

A) De?ation is likely to bene?t the economy because prices have fallen, making goods more affordable.
B) De?ation raises the real value of debt, making previously incurred debts less affordable.
C) De?ation refers to a sustained increase in the general price level.
D) A long period of de?ation is consistent with a high level of employment in the economy.

Question 23

Which of the following illustrates an increase in the full employment level of GDP?

A) An upward movement along the long-run aggregate supply curve.
B) A downward movement along the long-run aggregate supply curve.
C) A leftward shift of the long-run aggregate supply curve.
D) A rightward shift of the long-run aggregate supply curve.

Question 24

Consider an economy which is in both long-run and short-run equilibrium. Which of the following will occur in the short-run if consumer con?dence in this economy fell signi?cantly?

A) The aggregate demand curve will shift to the left.
B) Firms will increase production as real wages will have fallen.
C) The short-run aggregate supply curve will move to the right.
D) The level of in?ation in the economy will increase.

Question 25

With a constant nominal wage, a higher-than-expected level of in?ation in an economy _____.

A) will lead to a fall in real wages
B) will lead to a fall in employment
C) will reduce short-run output
D) will reduce the level of potential GDP

Question 26

Which of the following would cause an increase in long-run aggregate supply?

A) An in?ow of migrant workers in the economy.
B) A fall in the capital stock of an economy.
C) A decline in labour productivity in the economy.
D) A falling birth rate.

Question 27

Which of the following explains why an economy that has moved away from long-run equilibrium due to a fall in aggregate demand should avoid de?ation?

A) De?ation causes a rightward shift in the short-run aggregate supply curve.
B) De?ation is usually accompanied by an increase in employment.
C) Encouraged by lower prices, households increase the demand for goods and services.
D) Consumers often postpone consumption in the expectation that prices will fall further.

Question 28

A short-run supply shock, like an increase in oil prices, will lead to:

A) an increase in employment.
B) an increase in actual GDP.
C) a higher rate of in?ation.
D) a movement along the short-run aggregate supply curve.

Question 29

Which of the following is likely to occur if the actual rate of in?ation is lower than the expected rate of in?ation?

A) Real wages in the economy will fall.
B) The level of output will increase.
C) Workers will negotiate higher nominal wage agreements.
D) Firms will reduce employment and hire fewer workers.

Question 30

The long-run aggregate supply curve is _____.

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

Question 31

What is the short-run effect of a temporary supply shock?

A) The level of in?ation will be lower while output increases.
B) The level of output and in?ation both increase.
C) The level of in?ation will be higher but output remains the same.
D) The level of in?ation will be higher while output declines.

Question 32

In the event of a supply shock, a central bank that prioritizes stable in?ation over GDP, will:

A) try to boost aggregate demand.
B) increase interest rates.
C) not take any action because the supply shock is temporary.
D) increase money supply.

Question 33

The shape of the long-run aggregate supply curve implies that, in the long run, _____.

A) in?ation and GDP are negatively related
B) the rate of in?ation is constant
C) in?ation increases faster than nominal wages
D) output is in?ation inelastic.

Question 34

Which of the following is most likely to occur if the central bank of a country decides to boost aggregate demand in response to a temporary supply shock?

A) The economy will experience de?ation.
B) The level of output in the economy will fall further.
C) The aggregate demand curve will shift to the left.
D) The level of in?ation in the economy will increase further.

Question 35

In?ation targeting in the face of adverse supply shocks is likely to cause:

A) an increase in investment spending.
B) volatility in GDP.
C) the aggregate demand curve to move to the right.
D) instability in the price level.

Question 36

Which of the following correctly explains the Taylor rule?

A) It links interest rates to short-term deviations in in?ation and output.
B) It maps the changes in actual and potential GDP over time.
C) It shows the trade-off between unemployment and in?ation.
D) It links the growth of money supply to changes in the price level.

Question 37

Which of the following is true for an economy that has experienced a temporary supply shock?

A) The supply shock is likely to have shifted the short-run aggregate supply curve to the right.
B) There is likely to be a fall in in?ationary expectations in the economy.
C) Short-run macroeconomic equilibrium will consist of lower GDP and higher in?ation.
D) The central bank is likely to reduce interest rates to bring the in?ation rate down.

Question 38

Which of the following correctly explains why real wages may vary in the short run?

A) Workers usually prefer in?exible nominal wage agreements.
B) Since wage bargaining is costless, ?rms and workers negotiate new wages frequently.
C) The level of in?ation in most economies is stable.
D) In most industries, nominal wage adjustment is instantaneously linked to in?ation.

Question 39

Which of the following correctly represents the Taylor rule?

A) i = ? + i* + a(? - ?*) / b (GDP - GDP*), where ? is the in?ation rate, ?* is the target in?ation rate, GDP* is the potential GDP, and i* is the real interest rate.
B) i = ? + i* + a(? - ?*) + b (GDP - GDP*), where ? is the in?ation rate, ?* is the target in?ation
C) i = ? + i* + a(? - ?*) - b (GDP - GDP*), where ? is the in?ation rate, ?* is the target in?ation rate, GDP* is the potential GDP, and i* is the real interest rate.
D) i = ? + i* + a(? - ?*) * b (GDP - GDP*), where ? is the in?ation rate, ?* is the target in?ation

Question 40

Which of the following is likely to occur when in?ation moves above the target rate of in?ation in an economy?

A) Firms will stop hiring more workers.
B) The central bank will raise interest rates.
C) The level of real wages in the economy will increase.
D) The short-run output level will fall.

Question 41

Which of the following correctly illustrates the quantity theory of money?

A) velocity of money × price level = money supply × real GDP
B) money supply × velocity of money = real GDP × price level
C) (money supply - velocity of money) = (price level - real GDP)
D) money supply/velocity of money = price level/real GDP

Question 42

Which of the following is true regarding the implications of real business cycles?

A) It can dampen the impact of austerity measures taken to reduce structural de?cit.
B) It renders ?scal policy totally ineffective.
C) It invalidates the negative association between in?ation and aggregate demand.
D) It proves that the long-run aggregate supply curve is in fact ?xed for an economy, and

Question 43

A real business cycle is associated with _____.

A) a shift of the short-run aggregate supply curve
B) a change in aggregate demand
C) a shift of the long-run aggregate supply curve
D) a change in real income

Question 44

Which of the following can cause a real business cycle effect?

A) A new technology reducing the costs of economic transactions.
B) A rise in productivity brought about by more workers engaging in university education.
C) An out?ow of migrant workers.
D) An increase in production caused by increasing employment.

Question 45

Which of the following statements is true about in?ationary expectations?

A) Near-term in?ationary expectations are less volatile than long-term in?ationary expectations.
B) Near-term in?ationary expectations are much more volatile than long-term in?ationary
C) In?ation targets are a weak tool for controlling in?ationary expectations.
D) The central bank's ability to keep in?ation at target levels plays an insigni?cant role in

Question 46

Which of the following can lead to expectations of future price stability?

A) The central bank is credible in achieving the in?ation target.
B) Nominal wages are sticky and adjust slowly.
C) Costs rise in tandem with wages.
D) Commodity, fuel and food prices rise very quickly.

Question 47

For businesses, it is important to consider the future path of interest rates because:

A) businesses use borrowed funds to leverage their ?nancial returns.
B) businesses use equity to leverage their ?nancial returns.
C) they affect the long-run level of unemployment in an economy.
D) businesses use borrowed funds to maintain the high salaries of managers.

Question 48

Which of the following situations is likely to cause a central bank to undertake a loose monetary policy?

A) A rapidly rising in?ation level.
B) Very low in?ation level along with a rapid increase in unemployment.
C) In?ation below the target level along with good GDP growth.
D) Actual GDP substantially exceeding potential GDP.

Question 49

Which of the following is likely to be associated with a negative output gap?

A) Full employment.
B) Zero in?ation.
C) A boom.
D) A recession.

Question 50

According to the quantity theory of money:

A) there is a direct relationship between money supply and the price level.
B) money supply is negatively related to output.
C) the velocity of circulation of money in an economy is not stable.
D) the long-run aggregate supply schedule is positively sloped.

Question 51

Consider a very small economy with a potential output of £10 billion. The actual output is £7 billion while the in?ation level is 4 per cent. Which of the following can de?nitely be concluded if the long- run aggregate supply curve shifts to £9.5 billion?

A) The target rate of in?ation in this economy is 4 per cent.
B) The output gap is reduced to negative £2.5 billion due to the real business cycle effect.
C) The long-run unemployment level in this economy is 4 per cent.
D) The output gap changes to negative £0.5 billion as the long-run aggregate supply curve

Question 52

The _____ believe that markets adjust instantly, leading to long-run equilibrium.

A) gradual monetarists
B) new classical economists
C) moderate Keynesian economists
D) extreme Keynesian economists

Question 53

When an increase in aggregate demand causes higher in?ation, the central bank should _____ to bring in?ation back to the target level.

A) increase interest rates
B) restrict exports
C) increase the money supply
D) manage the exchange rate

Question 54

Which of the following is likely to occur if the government of an economy tries to reduce its structural de?cit?

A) An increase in government spending.
B) A cut in taxes.
C) A fall in company pro?ts.
D) A rise in cyclical de?cit.

Question 55

_____ hold the view that an economy may not move out of a recession and sticky prices and wages could instead move the economy to a depression.

A) Gradual monetarists
B) New classical economists
C) Moderate Keynesian economists
D) Extreme Keynesian economists

Question 56

What is meant by leverage?

A) It is the ability of a business to borrow from banks.
B) It refers to the use of debt to enable higher returns to shareholders.
C) It refers to the credit-worthiness of borrowers whom the bank extends loans to.
D) It is the practice of re-investing shareholders' funds in the business.

Question 57

In which of the following cases can business managers expect an increase in interest rates?

A) When actual in?ation is substantially lower than target in?ation.
B) When actual in?ation is substantially higher than target in?ation.
C) When actual GDP is lower than potential GDP.
D) When actual GDP is equal to potential GDP.

Question 58

In which of the following cases is the Bank of England likely to keep interest rates low?

A) If the Bank anticipates GDP to fall below its target.
B) If the current rate of in?ation is very high.
C) If interest rates in other leading economies is low.
D) If actual GDP exceeds potential GDP.

Question 59

Which of the following groups of economists believe that policy stimulus is likely to lead to an over- correction of the economy?

A) Gradual monetarists.
B) Mercantilists.
C) Extreme Keynesian economists.
D) Moderate Keynesian economists.

Question 60

The UK in?ation target is _____.

A) 0.5 per cent
B) 4.5 per cent
C) 6 per cent
D) 2 per cent

Question 61

The short-run Philips curve shifts downwards when there is a rise in inflationary expectations.

Question 62

The long run aggregate supply curve shows that prices are constant at any level of output, and is therefore horizontal.

Question 63

The trade off between unemployment and inflation shown by the Phillips curve is a short run outcome.

Question 64

When the aggregate demand in an economy falls, there is a downward movement along the short- run Philips curve.

Question 65

Rigidities in the adjustment process to full long-run equilibrium arise when:

A) there is agreement among ?rms and workers that the in?ation target is low.
B) in?ationary expectations are aligned with target rates.
C) in?ationary expectations veer away from target rates.
D) long-term concerns about in?ation seem to play a bigger role in economic decision

Question 66

The natural rate of unemployment varies with the level of inflation in the economy.

Question 67

When the short run GDP and the long run GDP coincide, then there exists an output gap in the economy.

Question 68

While inflation reduces real values, deflation increases real values.

Question 69

An economy's potential GDP is fixed; it cannot be changed.

Question 70

Aggregate demand is the sum of consumption, investment, government expenditure and net exports.

Question 71

When real wages are falling, the cost incentive to hire or fire workers is zero and unemployment remains constant.

Question 72

Through interest rates, there is a negative relationship between inflation and aggregate demand.

Question 73

In the long run, real wages are held constant through nominal wage increases being kept in line with inflation.

Question 74

When an output gap exists, fiscal or monetary policy should be neutral.

Question 75

In the short run, prices and wages do not affect output in an economy.

Question 76

Potential GDP is the level of output that could be produced in an economy if all factors of production were employed.

Question 77

If wage growth is greater than inflation, then workers actually become cheaper to hire and their value increases.

Question 78

Between 2001 and 2008, earnings growth in the UK has been lower than the rate of inflation.

Question 79

When the aggregate demand curve shifts to the left, there is a rise in prices and fall in GDP in the short run.

Question 80

The lesser the resistance to price and wage changes, the swifter an economy will return to equilibrium.