Question 1

An economist working for the Central Bank of Fredonia estimates a Phillips curve for Fredonia and reports the following points on the estimated curve.

Which of the following statements is correct?

Accepted Answer

The points reported on the estimated Phillips curve suggest a negative relationship between unemployment and inflation, which is consistent with the theoretical short-run Phillips curve. The long-run Phillips curve is vertical at the natural rate of unemployment, implying that changes in inflation in the long run are driven by changes in expected inflation rather than deviations from the natural rate. Therefore, the points on the estimated curve cannot be consistent with the long-run Phillips curve.

Question 2

If the government reduced the minimum wage and pursued expansionary monetary policy,then in the long run

Accepted Answer

If the government reduces the minimum wage, it will likely lower labor costs for firms, making it cheaper to hire workers, and as a result, reduces unemployment. Pursuing expansionary monetary policy is also likely to increase the overall demand in the economy and promote economic growth, resulting in lower unemployment. However, expansionary monetary policy typically increases inflationary pressures over the long run as more money is injected into the economy. Therefore, the unemployment rate would be lower, but the inflation rate would be higher.

Question 3

If an increase in inflation permanently reduced unemployment,then

Accepted Answer

The correct answer is B because if an increase in inflation permanently reduced unemployment, it implies that monetary policy (changes in the money supply) has real effects on the economy in the long run, indicating that money is not neutral. The long-run Phillips curve, which typically shows the relationship between inflation and unemployment, would slope downward in this scenario, reflecting the inverse relationship between inflation and unemployment.

Question 4

Moving from the late 1960s to 1970-1973,

Accepted Answer

Inflation continued to remain high during this period due to factors such as the increasing cost of imported oil and rising labor costs. However, the unemployment rate also increased during this period, reaching its highest point in 1975, indicating a sluggish economy. Therefore, option B is the correct choice.

Question 5

In the nineteenth century,some countries were on a gold standard so that on average the money supply growth rate was close to zero and expected inflation was more or less constant.For these countries during this time period,we find that increases in actual inflation were generally associated with falling unemployment.These findings

Accepted Answer

Friedman and Phelps's theories, which became known as the natural rate of unemployment, stated that there was a trade-off between inflation and unemployment in the short run when unexpected inflation occurred. Specifically, when actual inflation is higher than expected, firms were tricked into thinking that demand for their products was higher than it was, so they produced more, which required hiring more workers to meet increased production. This led to a fall in unemployment. Therefore, Option A is the correct choice.

Question 6

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

Accepted Answer

The politician's argument is inconsistent with the long-run Phillips curve because according to the curve, there is a trade-off between inflation and unemployment in the short run. However, in the long run, this trade-off disappears and any attempt to permanently reduce unemployment through an increase in the money supply growth rate will only lead to an increase in inflation. Therefore, the politician's claim that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate is incorrect and contradicts the long-run Phillips curve.

Question 7

Suppose the Federal Reserve makes monetary policy more expansionary.In the long run

Accepted Answer

In the long run, expansionary monetary policy increases inflation but does not affect the natural rate of unemployment, which remains the same.

Question 8

If people anticipate higher inflation,but inflation remains the same then

Accepted Answer

If people anticipate higher inflation, they may demand higher wages, causing higher costs for firms, which leads to an upward pressure on prices. If the actual inflation remains the same and does not meet the expectation of people, the short-run Phillips curve will shift right, indicating that higher unemployment is associated with any given level of inflation, as firms struggle to compete with higher costs, leading to layoffs and lower employment.

Question 9

Other things the same,if there is an increase in the money supply growth rate that is larger than expected,then in the short run

Accepted Answer

An unexpected increase in the money supply growth rate typically lowers interest rates in the short run, encouraging investment and consumption, which in turn increases demand for labor. This leads to a decrease in the unemployment rate, making it fall below its natural rate temporarily.

Question 10

In the early 1970s,the short-run Phillips curve shifted

Accepted Answer

In the early 1970s, the short-run Phillips curve shifted rightward as inflation expectations rose. This was due to the increase in actual inflation rates, which led workers to demand higher wages to keep up with the rising prices. As a result, firms increased their prices to cover the higher labor costs, creating a self-reinforcing cycle of inflation and wage increases. This shift in the Phillips curve meant that policymakers could no longer use short-run trade-offs between inflation and unemployment as a tool for stabilization policy.

Question 11

If people correctly anticipate that inflation will fall by 1%,then

Accepted Answer

The short-run Phillips curve represents the inverse relationship between inflation and unemployment. If people correctly anticipate a fall in inflation, it implies that inflationary expectations adjust downward. This adjustment can lead to a leftward shift in the short-run Phillips curve because lower inflation expectations can reduce wage and price pressures without changing the actual rate of unemployment, hence unemployment remains unchanged.

Question 12

Which of the following shifts the long-run Phillips curve left?

Accepted Answer

A decrease in the minimum wage rate would reduce firms' costs of production, which would lead to a decrease in the natural rate of unemployment, shifting the long-run Phillips curve left. An increase in the inflation rate, on the other hand, would shift the short-run Phillips curve upward but would have no effect on the long-run Phillips curve. Therefore, choice C is the correct answer.

Question 13

If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs,then which of the following curves would shift right?

Accepted Answer

By increasing incentives for unemployed individuals to find jobs, this policy change would lead to an increase in the productive capacity of the economy and reduce any potential inflationary pressure from higher wages, so the long-run aggregate supply curve would shift right. However, the long-run Phillips curve, which shows the trade-off between unemployment and inflation, is not affected by supply-side policies and thus would not shift in response to this policy change. Therefore, the correct answer is C.

Question 14

Which of the following implies that an increase in the money supply growth rate permanently changes the unemployment rate?

Accepted Answer

In the long run, the unemployment rate is determined by structural factors and is not affected by changes in the money supply. Both the long-run aggregate supply curve and the long-run Phillips curve are vertical, indicating that monetary policy does not have a permanent effect on the unemployment rate.

Question 15

By about 1973,U.S.policymakers had learned that

Accepted Answer

By about 1973, policymakers had learned that Friedman and Phelps's analysis of inflation and unemployment was correct, which implied that the short-run Phillips curve shifts when expectations of inflation change. Furthermore, policymakers had come to understand that there was no long-run trade-off between inflation and unemployment, as stated by the natural rate hypothesis. Therefore, all of the options (A, B, and C) are correct.

Question 16

Data for the United States traced out an almost perfect Phillips curve for much of the

Accepted Answer

During the 1960s, there was a well-established Phillips curve relationship between inflation and unemployment in the United States. This relationship broke down in the 1970s due to unexpected supply-side shocks and changes in inflation expectations.

Question 17

The economy is in long-run equilibrium when Senator Soldout argues that the Fed should do more to fight unemployment.He argues that if the Fed increased the money supply faster,more workers would find jobs.The Senator's argument

Accepted Answer

In the short run, an increase in the money supply can lead to lower interest rates and a boost in investment, which can increase output and employment. However, in the long run, this effect will diminish as prices and wages adjust to the higher level of aggregate demand, resulting in higher inflation and no change in unemployment. Therefore, the Senator's argument may be true in the short run but not in the long run.

Question 18

If the government reduced the minimum wage and pursued contractionary monetary policy,then in the long run

Accepted Answer

The answer of If the government reduced the minimum wage...

Question 19

Suppose the Federal Reserve pursues contractionary monetary policy.In the long run

Accepted Answer

Contractionary monetary policy is aimed at reducing inflation. In the short run, it may lead to a temporary increase in unemployment. However, in the long run, it will lead to a reduction in inflation and no significant change in the unemployment rate, as wages and prices adjust to the new monetary policy. Therefore, option D is the best choice.

Question 20

By about 1973,U.S.policymakers had learned that

Accepted Answer

By about 1973, U.S. policymakers had learned that there is no trade-off between inflation and unemployment in the long run. This idea was popularized by the work of economists Milton Friedman and Edmund Phelps, and became known as the "natural rate of unemployment" hypothesis. According to this hypothesis, attempts to reduce unemployment below its natural rate would only lead to higher inflation in the long run.

Quiz 22: The Short Run Trade Off Between Inflation and Unemployment: Shifts in the Phillips Curve the Role of Expectations

An economist working for the Central Bank of Fredonia estimates a Phillips curve for Fredonia and reports the following points on the estimated curve. Which of the following statements is correct?

If the government reduced the minimum wage and pursued expansionary monetary policy,then in the long run

If an increase in inflation permanently reduced unemployment,then

Moving from the late 1960s to 1970-1973,

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

Suppose the Federal Reserve makes monetary policy more expansionary.In the long run

If people anticipate higher inflation,but inflation remains the same then

Other things the same,if there is an increase in the money supply growth rate that is larger than expected,then in the short run

In the early 1970s,the short-run Phillips curve shifted

If people correctly anticipate that inflation will fall by 1%,then

Which of the following shifts the long-run Phillips curve left?

If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs,then which of the following curves would shift right?

Which of the following implies that an increase in the money supply growth rate permanently changes the unemployment rate?

By about 1973,U.S.policymakers had learned that

Data for the United States traced out an almost perfect Phillips curve for much of the

The economy is in long-run equilibrium when Senator Soldout argues that the Fed should do more to fight unemployment.He argues that if the Fed increased the money supply faster,more workers would find jobs.The Senator's argument

If the government reduced the minimum wage and pursued contractionary monetary policy,then in the long run

Suppose the Federal Reserve pursues contractionary monetary policy.In the long run

By about 1973,U.S.policymakers had learned that