Deck 34: The Trade-Off between Inflation and Unemployment

Question 1

In December of 2007, with an unemployment rate of 5.0 percent, most economists believed this was above the natural rate.

Answer 1

False

Question 2

Demand-side inflation is usually accompanied by increasing real GDP, while supply-side inflation is usually accompanied by falling real GDP.

Answer 2

True

Question 3

The Phillips curve explains the trade-off between inflation and unemployment.

Answer 3

True

Question 4

The Phillips curve assumes that shocks to the economy come from the demand side.

Question 5

Every year from 1954 to 1984, the U.S.economy was characterized by higher output and lower prices.

Question 6

The Phillips curve shows the relationship between the rate of inflation and the rate of growth of real GDP.

Question 7

Supply-side inflation will increase the price level and reduce real GDP.

Question 8

In 2010 the U.S.economy's inflation rate was higher than its unemployment rate.

Question 9

Expansionary fiscal and monetary policy from 2008 to 2010, took the risk of being inflationary for the sake of avoiding additional unemployment.

Question 10

The cure for inflation can come only from changes on the demand side.

Question 11

If aggregate demand grows faster than aggregate supply, the equilibrium price level will rise.

Question 12

Inflation can come from the demand side or from the supply side of the economy.

Question 13

The economy's self-correcting mechanism ensures that neither recessionary nor inflationary gaps will be eliminated eventually.

Question 14

The supply-side shocks of the 1970s shifted the aggregate supply curve inward.

Question 15

An inflationary gap will eliminate itself through a process of price increases.

Question 16

The U.S.economy in the 1990s benefited from an aggregate supply curve shifting outward.

Question 17

A stimulus to aggregate demand will normally pull prices up but cause a reduction in output.

Question 18

An economy eliminates a recessionary gap by reducing wages and prices.

Question 19

If the U.S.economy had grown faster than it actually did from 2009 to 2010, the unemployment rate would have been higher.

Question 20

The natural rate of unemployment corresponds to what is sometimes called the full employment unemployment rate.

Question 21

Monetarists typically favor strong policy measures to fight recession.

Question 22

If nominal wages increase at the same rate as inflation, then the aggregate supply curve will be a horizontal line.

Question 23

The government can fight inflation by manipulating both aggregate demand and aggregate supply.

Question 24

If rational expectations are assumed, inflation can be reduced with no corresponding increase in unemployment.

Question 25

The aggregate supply curve slopes upward when the real wage falls initially as the price level rises.

Question 26

Workers expecting inflation will expect wage increases to be built into their wage contracts.

Question 27

European governments accepted prolonged periods of unemployment in the 1990s in order to reduce inflation.

Question 28

The rational expectations hypothesis is impeccably logical, but inconsistent with the facts.

Question 29

If expectations are rational, the difference between the actual rate of inflation and the expected rate of inflation will be zero.

Question 30

Keynesian economists generally agree that unemployment is more costly than inflation.

Question 31

Fiscal and monetary policy can reduce unemployment with no negative side effects.

Question 32

According to rational expectations theory, a long period of unemployment is necessary to reduce inflation.

Question 33

An increase in aggregate demand will reduce the unemployment rate only if the ensuing inflation is anticipated.

Question 34

If the short-run Phillips curve is fairly horizontal, attempts to fight inflation will generate considerable unemployment.

Question 35

The rational expectations theory claims that workers and firms will not make systematic errors when they forecast inflation.

Question 36

Most economists and policy makers decided in 2007-2010 that reducing unemployment was the main national priority.

Question 37

One explanation for the increase in the natural rate of unemployment in 2010 was a mismatch between the skills of the American labor force and the skills that the modern job market demanded.

Question 38

An example of indexing is a "cost of living" adjustment clause in a wage contract.

Question 39

To make rational forecasts, your predictions do not have to be correct all of the time.

Question 40

Inflation targeting requires monetary policy makers to rely heavily on the Phillips curve.

Question 41

An increase in AD will trigger more inflation under which of the following conditions?

A) AD is relatively steep.
B) AD is relatively flat.
C) AS is relatively steep.
D) AS is relatively flat.

Question 42

Which of the following could trigger supply-side inflation?

A) a decrease in the wage rate for all workers
B) an increase in raw materials' prices
C) an increase in productivity of capital
D) an increase in the labor force

Question 43

Figure 17-1

Which of the following is true about the economy depicted in Figure 17-1?

A) Tax incentives are being used to stimulate aggregate supply.
B) Policy makers believe the costs of unemployment are higher than the costs of inflation.
C) Contractionary monetary policy is being enacted to fight inflation.
D) Prices are rising but real GDP is falling.

Question 44

Figure 17-1

Which of the following is true about the economy depicted in Figure 17-1?

A) It is experiencing supply-side inflation.
B) Policy makers have chosen to fight inflation rather than unemployment.
C) The increase in aggregate demand has increased prices but not real GDP.
D) The slope of the aggregate supply curve embodies the trade-off between unemployment and inflation.

Question 45

If economic fluctuations originate on the supply side,

A) there will be no relationship between unemployment and inflation.
B) real wage increases will be necessary to eliminate unemployment.
C) inflation and unemployment will be negatively related.
D) inflation and unemployment will be positively related.

Question 46

The economy's self-correcting mechanism to eliminate a recessionary gap relies on

A) falling interest rates that shift the aggregate demand curve outward.
B) falling wage rates that shift the aggregate supply curve outward.
C) rising wage rates that shift the aggregate supply curve inward.
D) increases in the price level that shift the aggregate supply curve inward.

Question 47

Which of the following could trigger demand-side inflation?

A) a decrease in the money supply
B) an increase in taxes
C) an increase in government spending
D) an increase in interest rates

Question 48

Demand-side inflation differs from supply-side inflation in the following way:

A) demand-side inflation has higher output; supply-side inflation has lower output.
B) demand-side inflation has lower output; supply-side inflation has higher output.
C) demand-side inflation is always followed by stagflation; supply-side inflation is always followed by demand-side inflation.
D) demand-side inflation has a self-correcting mechanism; supply-side inflation does not.

Question 49

A decrease in AS will trigger less inflation under which of the following conditions?

A) AD is relatively steep.
B) AD is relatively flat.
C) AS is relatively steep.
D) AS is relatively flat.

Question 50

Figure 17-2

Given the situation in graph (1) in Figure 17-2, what action could be expected from the economy's self-correcting mechanism?

A) an increase in aggregate demand
B) a decrease in aggregate demand
C) an increase in aggregate supply
D) a decrease in aggregate supply

Question 51

Figure 17-3

Given the situation in graph (1) in Figure 17-3, what can be expected to change in graph (1) when the economy's self-correcting mechanism operates?

A) aggregate demand increases
B) aggregate demand decreases
C) aggregate supply increases
D) aggregate supply decreases

Question 52

A decrease in the price of foreign oil will affect the U.S.economy by

A) increasing aggregate demand.
B) decreasing aggregate demand.
C) increasing aggregate supply.
D) decreasing aggregate supply.

Question 53

A decrease in AS will trigger more inflation under which of the following conditions?

A) AD is relatively steep.
B) AD is relatively flat.
C) AS is relatively steep.
D) AS is relatively flat.

Question 54

A reduction in aggregate demand will normally reduce

A) prices.
B) real GDP.
C) employment.
D) All of the above are correct.

Question 55

An increase in AD will trigger less inflation under which of the following conditions?

A) AD is relatively steep.
B) AD is relatively flat.
C) AS is relatively steep.
D) AS is relatively flat.

Question 56

Figure 17-3

Given the situation in graph (1) in Figure 17-3, what movement would be expected in graph (2) from the economy's self-correcting mechanism?

A) A to B
B) A to D
C) C to E
D) D to C

Question 57

What is the crucial difference between inflation generated on the demand side versus inflation generated on the supply side?

A) Demand-side inflation is short-lived, while supply-side inflation lasts for a long time.
B) Demand-side inflation leads to budget surpluses, while supply-side inflation contributes to budget deficits.
C) Supply-side inflation is subject to control of policy makers, while demand-side inflation is beyond their reach.
D) Demand-side inflation is normally accompanied by rising real GDP, while supply-side inflation may be accompanied by falling real GDP.

Question 58

Figure 17-2

Given the situation in graph (1) in Figure 17-2, what movement would be expected in graph (2) from the economy's self-correcting mechanism?

A) A to B
B) A to D
C) C to E
D) D to C

Question 59

Stagflation can be defined as a situation characterized by

A) rising prices and rising output.
B) rising prices and falling output.
C) falling prices and falling output.
D) falling prices and rising output.

Question 60

The economy's self-correcting mechanism

A) tends to push unemployment toward a specific point called the natural rate of unemployment.
B) works better at correcting inflationary gaps than recessionary gaps.
C) cannot work if the Phillips curve is vertical.
D) ensures that the economy will not have to endure a long period of high unemployment.

Question 61

A scatter diagram of the position of the U.S.economy from 1972 through 2007 with the price level on the vertical axis and real GDP on the horizontal axis would show a movement generally toward the

A) northwest.
B) northeast.
C) southwest.
D) southeast.

Question 62

A study of the U.S.price level and real GDP from 1972 to 2007 reveals a clear upward march toward higher prices and greater output.What explains this?

A) Both the aggregate demand curve and the aggregate supply curve have shifted to the left year after year.
B) Both the aggregate demand curve and the aggregate supply curve have shifted to the right year after year.
C) The aggregate supply curve has shifted to the right while the aggregate demand curve has shifted to the left.
D) The aggregate supply curve has shifted to the left while the aggregate demand curve has shifted to the right.

Question 63

If aggregate demand had grown faster than it did from 2009 to 2010, then the U.S.economy would have experienced

A) higher unemployment and higher inflation.
B) lower unemployment and lower inflation.
C) higher unemployment and lower inflation.
D) lower unemployment and higher inflation.

Question 64

Which of the following is most likely to result in unemployment?

A) Aggregate demand grows more rapidly than aggregate supply.
B) Aggregate demand and aggregate supply grow at the same rate.
C) Aggregate supply grows more rapidly than aggregate demand.
D) Neither aggregate demand nor aggregate supply grows at all.

Question 65

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate supply increases, then data would show

A) a cyclical relationship between inflation and unemployment.
B) a direct relationship between inflation and unemployment.
C) an inverse relationship between inflation and unemployment.
D) no relationship between inflation and unemployment.

Question 66

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate demand increases, then data would show the

A) worst recession occurs when output expands most rapidly.
B) slowest inflation occurs when output expands most rapidly.
C) slowest economic growth occurs when output grows most rapidly.
D) most rapid inflation occurs when output expands most rapidly.

Question 67

If AD and AS increase at exactly the same rate, the result will be

A) demand-side inflation.
B) supply-side inflation.
C) falling prices.
D) stable prices.

Question 68

If AD increases at a faster rate than AS, the result will be

A) demand-side inflation.
B) supply-side inflation.
C) falling prices.
D) stable prices.

Question 69

If aggregate demand in the U.S.had grown more slowly than it actually did in 2010, the

A) unemployment rate would have been even lower.
B) inflation rate would have been even lower.
C) unemployment rate would have been the same.
D) economy would have grown faster.

Question 70

If AS increases at a faster rate than AD, the result will be

A) demand-side inflation.
B) supply-side inflation.
C) falling prices.
D) stable prices.

Question 71

Aggregate demand grows because

A) patent laws protect and stimulate new inventions.
B) there is more machinery and technology improves.
C) the government increases its spending, a growing population increases consumer spending, and the Fed increases the money supply.
D) All of the above are correct.

Question 72

On the vertical axis, the Phillips curve depicts the

A) the rate of unemployment.
B) rate of inflation.
C) rate of growth of nominal GDP.
D) rate of growth of real GDP.

Question 73

Which of the following observations concerning the Phillips curve is not true?

A) They are normally upward-sloping.
B) They are more commonly constructed for price inflation.
C) They depict the inverse relation between wage inflation and unemployment.
D) They depict the rate of unemployment on the horizontal axis.

Question 74

Aggregate supply tends to grow because

A) there are more workers in the economy every year.
B) there is more capital in the economy every year.
C) technology tends to improve every year.
D) All of the above are correct.

Question 75

During the 1960s and early 1970s, economists believed that the Phillips curve indicated

A) that higher inflation was the price for more unemployment.
B) that higher levels of employment could be achieved with lower inflation.
C) a menu of choices for policy makers.
D) All of the above are correct.

Question 76

A movement from an upper point to a lower point on the Phillips curve shows

A) decrease in the inflation and decrease in the unemployment.
B) increase in the inflation and decrease in the employment.
C) increase in the inflation and increase in the employment.
D) decrease in the inflation and increase in the unemployment.

Question 77

As a generalization, it can be said that

A) aggregate demand shifts to the right every year, but aggregate supply rarely does.
B) aggregate supply shifts to the right every year, but aggregate demand rarely does.
C) both aggregate demand and aggregate supply shift to the right each year.
D) neither aggregate demand nor aggregate supply curve shifts to the right each year.

Question 78

The unemployment rate for the U.S.economy in 2010 averaged about

A) 10 percent.
B) 8 percent.
C) 4 percent.
D) 2 percent.

Question 79

The Phillips curve shows the relationship between

A) the rate of inflation and the rate of unemployment.
B) the rate of growth of real GDP and the rate of unemployment.
C) real prices and real GDP.
D) the rate of inflation and the rate of growth of real GDP.

Question 80

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate demand increases, then data would show

A) a cyclical relationship between inflation and unemployment.
B) a direct relationship between inflation and unemployment.
C) an inverse relationship between inflation and unemployment.
D) no relationship between inflation and unemployment.