Question 1

In the long run, cost-push inflation results in a simultaneous decrease in the price level and real output.

Accepted Answer

Cost-push inflation occurs when the cost of production increases, leading to a decrease in aggregate supply. This can result in an increase in the price level, but also a decrease in real output due to producers reducing production to maintain profit margins. Therefore, in the long run, cost-push inflation can result in a decrease in real output and an increase in the price level.

Question 2

Economists often recommend active monetary policy, and perhaps fiscal policy, to counteract the recessions.

Accepted Answer

Economists generally advise using monetary policy (such as adjusting interest rates) and sometimes fiscal policy (such as government spending or tax cuts) to help boost the economy during a recession.

Question 3

The long-run Phillips Curve is vertical at the natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve shows that there is no trade-off between inflation and unemployment, and that the natural rate of unemployment (the rate at which the economy is at full employment without causing inflationary pressures) is the level at which inflation is stable. Therefore, the long-run Phillips Curve is vertical at the natural rate of unemployment.

Question 4

Based on the long-run Phillips Curve, any particular rate of inflation is compatible in the long run with the natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve suggests that there is a trade-off between inflation and unemployment in the short run, but in the long run, any particular rate of inflation is compatible with the natural rate of unemployment. This means that the long-run Phillips Curve is a vertical line at the natural rate of unemployment.

Question 5

When the economy is experiencing cost-push inflation, an increase in aggregate demand will likely result in less inflation.

Accepted Answer

Cost-push inflation is caused by an increase in production costs, such as wages and raw materials. Therefore, increasing aggregate demand will not solve this type of inflation since it does not address the root cause. In fact, it may even worsen inflation by increasing demand for goods and services, which can further drive up prices.

Question 6

If the government attempts to maintain full employment under conditions of cost-push inflation, deflation is likely to occur.

Accepted Answer

Cost-push inflation occurs when overall prices increase due to increases in the cost of wages and raw materials, while maintaining full employment typically involves policies that stimulate demand. Attempting to maintain full employment in such a scenario would not lead to deflation, but could potentially exacerbate inflation by increasing demand further.

Question 7

The short-run aggregate supply curve shifts to the left when nominal wages rise in response to price level increases.

Accepted Answer

When nominal wages rise in response to price level increases, production costs increase and firms have less incentive to produce output at the current price level. This results in a leftward shift of the short-run aggregate supply curve.

Question 8

Many economists accept the idea of a short-run tradeoff between the unemployment and inflation rates, but they do not think that there is such a tradeoff in the long run.

Accepted Answer

This idea is often referred to as the Phillips curve and suggests that in the short run there is an inverse relationship between inflation and unemployment rates. However, in the long run, this tradeoff disappears and the economy tends toward its natural rate of unemployment, which is determined by factors such as labor force demographics, technology, and institutions.

Question 9

The long-run aggregate supply curve is vertical.

Accepted Answer

The long-run aggregate supply curve is vertical because in the long run, factors such as capital, technology, and labor become flexible and can adjust to changes in price levels. This means that changes in overall price levels do not have an effect on the aggregate supply.

Question 10

In the short run, demand-pull inflation will drive up the price level and increase real output; in the long run, only the price level will rise.

Accepted Answer

In the short run, demand-pull inflation can increase both the price level and real output due to underutilized resources. However, in the long run, the economy reaches its full employment level, and any further increases in demand only raise the price level, not output.

Question 11

Demand-pull inflation and cost-push inflation are identical concepts because both entail rising nominal wages and rising prices.

Accepted Answer

Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, causing an increase in prices. Cost-push inflation, on the other hand, occurs when production costs increase, leading to higher prices. While both can result in rising prices, they have different underlying factors causing the inflation.

Question 12

The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment.

Accepted Answer

The Phillips Curve suggests an inverse relationship between the rate of unemployment and the rate of inflation, not between the price level and the level of employment directly.

Question 13

An ongoing economic growth causes continuous leftward shifts of the aggregate supply which, by themselves, would tend to cause an ongoing deflation.

Accepted Answer

An ongoing economic growth causes rightward shifts of the aggregate supply, not leftward shifts. This increase in supply would tend to counteract any inflationary pressures and may even lead to a decrease in price levels, but it would not necessarily result in deflation.

Question 14

An upward shift of the Phillips Curve is consistent with the occurrence of stagflation.

Accepted Answer

An upward shift of the Phillips Curve reflects a decrease in the short-run trade-off between inflation and unemployment, meaning that even higher levels of inflation cannot be traded-off for lower levels of unemployment. Stagflation typically occurs when there is a combination of high inflation and high unemployment, which suggests that the economy has experienced an upward shift of the Phillips Curve.

Question 15

More inflation is likely to result when the government enacts policies to maintain full employment when there is cost-push inflation.

Accepted Answer

Maintaining full employment during cost-push inflation may require the government to increase spending and stimulate demand, which can lead to an increase in prices and further inflation.

Question 16

In the long-run firms respond to the lower profits by reducing their nominal wage increases.

Accepted Answer

In the long-run, firms may reduce their nominal wage increases in response to lower profits as a way to adjust and improve their competitive position.

Question 17

Most economists reject the idea of a long-run tradeoff between unemployment and inflation.

Accepted Answer

This idea, known as the Phillips curve, suggests that there is a negative relationship between unemployment and inflation in the short run, but in the long run, this relationship disappears and there is no tradeoff between the two. However, most economists now believe that there is no long-run tradeoff between unemployment and inflation, even in the short run this tradeoff is not always consistent.

Question 18

A shift in the Phillips Curve to the left will improve the "inflation-unemployment" choices available to society.

Accepted Answer

A shift to the left in the Phillips Curve indicates that, at any given level of unemployment, there is now a lower rate of inflation. This means that society has more favorable options for controlling inflation and unemployment simultaneously, which is a positive outcome.

Question 19

The characteristics of the long-run Phillips Curve suggest that the economy is generally stable at its natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve suggests that there is no trade-off between inflation and unemployment in the long run, and that the economy will eventually return to its natural rate of unemployment regardless of the level of inflation. This suggests that the economy is generally stable at its natural rate of unemployment.

Question 20

The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve is vertical, not horizontal, at the economy's natural rate of unemployment, indicating that there is no trade-off between inflation and unemployment in the long run.

Quiz 16: Part B: Long-Run Macroeconomic Adjustments