Question 1

In the long run, the natural rate of unemployment depends primarily on the growth rate of the money supply.

Accepted Answer

The natural rate of unemployment is determined by structural factors such as demographics, technology, and labor market institutions. The growth rate of the money supply can affect inflation and short-term fluctuations in unemployment, but it does not have a significant long-term impact on the natural rate of unemployment.

Question 2

If the Fed were to increase the money supply, inflation would increase and unemployment would decrease in the short run.

Accepted Answer

Increasing the money supply can lead to increased demand for goods and services, which can drive up prices (inflation) in the short run. This increased demand can also lead to increased hiring, potentially reducing unemployment in the short run. However, in the long run, inflation can become unsustainable and lead to negative economic consequences. Additionally, the relationship between money supply, inflation, and unemployment is complex and can be affected by a variety of factors.

Question 3

A given short-run Phillips curve shows that an increase in the inflation rate will be accompanied by a lower unemployment rate in the short run.

Accepted Answer

This is the basic relationship depicted by the Phillips curve. In the short run, as prices rise and inflation increases, firms may increase their output and require more labor, leading to a decrease in unemployment. However, in the long run, this relationship is not sustainable as wages and prices adjust, leading to a return to the natural rate of unemployment.

Question 4

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

Accepted Answer

When the central bank decreases the rate at which it increases the money supply, this is called contractionary monetary policy. This policy leads to higher interest rates, which makes borrowing and investing more expensive, causing a decrease in aggregate demand. This decrease in demand leads to a rise in unemployment and a fall in inflation in the short run.

Question 5

Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible economic outcomes.

Accepted Answer

Samuelson and Solow's analysis of the Phillips curve in the 1960s suggested that policymakers could choose between various combinations of inflation and unemployment levels depending on their preferences and priorities. Thus, they believed that the Phillips curve offered a menu of possible economic outcomes for policymakers to consider.

Question 6

Other things the same, a decrease in aggregate demand decreases both inflation and unemployment.

Accepted Answer

A decrease in aggregate demand typically leads to lower inflation but higher unemployment, as reduced demand for goods and services can lead to lower prices but also less production, which can result in layoffs or reduced hiring.

Question 7

Most economists believe that a tradeoff between inflation and unemployment exists

Accepted Answer

The answer of Most economists believe that a tradeoff between...

Question 8

Short-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.

Accepted Answer

Short-run outcomes in the economy are often measured by changes in output and the price level, as well as fluctuations in unemployment and inflation rates.

Question 9

In the long run, the inflation rate depends primarily on the growth rate of the money supply.

Accepted Answer

According to the quantity theory of money, in the long run, the inflation rate is directly proportional to the growth rate of the money supply. This means that an increase in the money supply will lead to a proportional increase in the general price level.

Question 10

The long-run response to an increase in the growth rate of the money supply is shown by shifting

Accepted Answer

The answer of The long-run response to an increase in...

Question 11

The long-run response to a decrease in the money supply growth rate is shown by shifting

Accepted Answer

The answer of The long-run response to a decrease in...

Question 12

In response to the financial crisis of 2007-2008, policymakers used

Accepted Answer

In response to the financial crisis of 2007-2008, policymakers used expansionary monetary policy (through decreasing interest rates and increasing the money supply) to stimulate economic growth and expansionary fiscal policy (through increased government spending, tax cuts, and stimulus packages) to support the economy and prevent a recession.

Question 13

Which of the following is not correct?

Accepted Answer

Unemployment can also be influenced by factors such as technological changes, changes in labor force participation, and shifts in consumer preferences, in addition to government policy.

Question 14

Fiscal policy cannot be used to move the economy along the short-run Phillips curve.

Accepted Answer

Fiscal policy can be used to shift the aggregate demand curve and impact inflation and unemployment, which affects the position on the short-run Phillips curve.

Question 15

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

Accepted Answer

This is known as the Phillips curve, which shows an inverse relationship between inflation and unemployment. As aggregate demand increases, firms hire more workers and pay higher wages, which leads to higher prices and inflation. Conversely, when there is low aggregate demand and high unemployment, there is less pressure on wages and prices to increase. Therefore, there is a tradeoff between the two, as policymakers need to balance the desired level of inflation with the desired level of employment.

Question 16

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is

Accepted Answer

The sacrifice ratio measures the reduction in output and increase in unemployment that a central bank must accept to achieve a one percentage point reduction in inflation. This is calculated as the ratio of the percentagepoint decline in output to the percentage-point reduction in inflation. In this case, the central bank reduced inflation by 2 percentage points, but output fell by 3 percentage points and unemployment rose by 5 percentage points. Therefore, the sacrifice ratio is:

Sacrifice ratio = (percentage-point decline in output)/(percentage-point reduction in inflation)
= 3/2
Therefore, the answer is B.

Question 17

Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.

Accepted Answer

When there is an increase in aggregate demand, businesses need to produce more goods and services to meet the demand, which results in an increase in employment. This leads to a decrease in unemployment. However, as production increases, the demand for inputs such as labor and capital increases, which eventually raises prices, causing inflation in the short run.

Question 18

The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

Accepted Answer

The short-run Phillips curve suggests that expansionary monetary policy will temporarily lower the unemployment rate below its natural rate, as it stimulates economic activity.

Question 19

The short-run Phillips curve is based on the classical dichotomy.

Accepted Answer

The short-run Phillips curve is based on the assumption that there is a trade-off between inflation and unemployment in the short run. This contradicts the classical dichotomy, which states that in the long run, real variables (such as output and employment) are determined by real factors (such as technology and resources), while nominal variables (such as prices and inflation) are determined by monetary factors.

Question 20

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run

Accepted Answer

The answer of Other things the same, if the central...

Quiz 17: The Short-Run Trade-Off Between Inflation and Unemployment