Question 1

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible
A) should not see an increase in the unemployment rate even in the short run.
B) will having rising unemployment for a while, but then return to the natural rate of unemployment.
C) will have a permanently higher unemployment rate.
D) None of the above is suggested by the arguments of Friedman and Phelps.

Accepted Answer

According to the arguments of Friedman and Phelps, a disinflationary policy that is not completely credible will initially lead to an increase in unemployment as workers adjust their expectations of inflation. However, over time, this increase in unemployment should be temporary as expectations adjust and the economy returns to the natural rate of unemployment. Therefore, option B is the best choice. Option A is incorrect, as there should be a short-run increase in unemployment. Option C is incorrect, as the unemployment rate should eventually return to its natural rate. Option D is incorrect, as the arguments of Friedman and Phelps do suggest a temporary increase in unemployment.

Question 2

Other things the same, a country that decides to reduce inflation will
A) have a higher unemployment rate in the short run and the long run.
B) have a higher unemployment rate only in the long run.
C) have a higher unemployment rate only in the short run.
D) not have a higher unemployment rate in either the short run or the long run.

Accepted Answer

To reduce inflation, a country might take contractionary monetary or fiscal policies, such as raising interest rates, reducing government spending or increasing taxes. These policies will lead to a decrease in aggregate demand and output, causing firms to lay off workers and increasing unemployment in the short run. However, the unemployment rate will eventually decrease as the market adjusts to the new equilibrium. In the long run, the economy will have stabilized with a lower inflation rate and a lower natural rate of unemployment.

Question 3

Monetary Policy in Flosserland
In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.
A) both the Classical dichotomy and the long-run Phillips curve
B) the Classical dichotomy, but not the long run Phillips curve
C) the long-run Phillips curve, but not the Classical dichotomy
D) neither the long-run Phillips curve nor the Classical dichotomy

Accepted Answer

The answer of Monetary Policy in Flosserland
In Flosserland, the Department...

Question 4

Monetary Policy in Flosserland
In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then
A) unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
B) unemployment falls, but it would have fallen more if people had been expecting 22% inflation.
C) unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
D) unemployment rises, but it would have risen more if people had been expecting 22% inflation.

Accepted Answer

If the public had expected inflation to be reduced to only 20%, then the campaign promising a reduction to 12.5% would have raised expectations beyond what was feasible. As a result, when inflation was only reduced to 25% instead of the promised 12.5%, it would have had a smaller impact on unemployment because the public's expectations were already elevated. Therefore, unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.

Question 5

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment
A) rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
B) rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
C) falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
D) falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

Accepted Answer

The answer of Suppose a central bank takes actions that...

Question 6

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting
A) aggregate demand to the right.
B) aggregate demand to the left.
C) aggregate supply to the right.
D) aggregate supply to the left.

Accepted Answer

The answer of The Economy in 2008
In the first half...

Question 7

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by
A) moving to the right along the short-run Phillips curve.
B) moving to the left along the short-run Phillips curve.
C) shifting the short-run Phillips curve right.
D) shifting the short-run Phillips curve left.

Accepted Answer

The answer of The Economy in 2008
In the first half...

Question 8

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by
A) moving to the right along the short-run Phillips curve.
B) moving to the left along the short-run Phillips curve.
C) shifting the short-run Phillips curve right.
D) shifting the short-run Phillips curve left.

Accepted Answer

Rising world commodity prices would shift the short-run Phillips curve right, as it would increase the input costs for businesses and cause a temporary increase in inflation. This would result in higher unemployment in the short-run as firms adjust to the new costs.

Question 9

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of
A) adverse supply shocks that shifted the short-run Phillips curve left.
B) adverse supply shocks that shifted the short-run Phillips curve right.
C) favorable supply shocks that shifted the short-run Phillips curve left.
D) favorable supply shocks that shifted the short-run Phillips curve right.

Accepted Answer

Favorable supply shocks, such as technological advancements and increased productivity, would shift the short-run Phillips curve left, leading to both lower inflation and unemployment. Adverse supply shocks, such as a sudden decrease in oil supply or an increase in production costs, would shift the short-run Phillips curve right, leading to higher unemployment and inflation.

Question 10

Monetary Policy in Flosserland
In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If Flosserlanders believe their government then which, if any, curves) shift left?
A) the short-run and the long-run Phillips curve
B) the short-run but not the long run Phillips curve
C) the long-run but not the short-run Phillips curve
D) neither the short-run nor the long-run Phillips curve

Accepted Answer

If the public believes the government's announcement to reduce inflation, their expectations of future inflation will decrease. This will lead to a shift in the short-run Phillips curve to the left, as there will be less inflationary pressure in the economy in the short run. However, the long-run Phillips curve will not shift as it is determined by structural factors such as natural rate of unemployment and productivity.

Question 11

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises
A) raise both inflation and the unemployment rate.
B) raise the inflation rate and reduce the unemployment rate.
C) reduce the inflation rate and raise the unemployment rate.
D) reduce both the inflation rate and the unemployment rate.

Accepted Answer

In the short-run, the effects of the housing and financial crises reduce the inflation rate and raise the unemployment rate. This is because the crisis leads to a decrease in consumer spending and investment, which in turn reduces demand for goods and services. As a result, businesses may have to lower prices to incentivize consumption, and there may be layoffs or reduced hiring due to the decreased demand. Both of these factors lead to a decrease in inflation and an increase in unemployment.

Question 12

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. In the short run the increased prices of world commodities
A) raised both the price level and output.
B) raised the price level and reduced output.
C) reduced the price level and raised output.
D) reduced both the price level and output.

Accepted Answer

The increased prices of world commodities would have reduced the purchasing power of consumers and increased the cost of production for businesses, leading to a rise in the price level. The reduction in purchasing power would also result in a decrease in demand and thus a reduction in output. Therefore, both the price level and output would have been reduced.

Question 13

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. The effects of the housing and financial crises could be shown by shifting
A) aggregate demand to the right.
B) aggregate demand to the left.
C) aggregate supply to the right.
D) aggregate supply to the left.

Accepted Answer

The housing and financial crises would lead to a decreased confidence in the economy, which would lead to a decrease in consumption and investment. This would shift aggregate demand to the left, causing a decrease in both output and prices.

Question 14

If a central bank attempts to lower the inflation rate but the public doesn't believe the inflation rate will fall as far as the central bank says, then in the short run unemployment
A) rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
B) rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
C) falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
D) falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

Accepted Answer

The answer of If a central bank attempts to lower...

Question 15

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to the Economy in 2008. In the short-run the housing and financial crises
A) raised both the price level and output.
B) raised the price level and reduced output.
C) reduced the price level and raised output.
D) reduced both the price level and output.

Accepted Answer

The answer of The Economy in 2008
In the first half...

Question 16

If inflation expectations rise, the short-run Phillips curve shifts
A) left. If inflation remains the same, unemployment falls.
B) left. If inflation remains the same, unemployment rises.
C) right. If inflation remains the same, unemployment falls.
D) right. If inflation remains the same, unemployment rises.

Accepted Answer

When inflation expectations rise, workers will make higher nominal wage demands, and firms will raise prices to cover these higher wage costs. As a result, the short-run Phillips curve shifts rightward indicating that the economy must have a higher rate of unemployment to maintain the same rate of inflation. Therefore, the correct choice is D, which states that if inflation remains the same, unemployment rises.

Question 17

Monetary Policy in Flosserland
In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
A) unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
B) unemployment falls, but it would have fallen more if people had been expecting 25% inflation.
C) unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
D) unemployment rises, but it would have risen more if people had been expecting 25% inflation.

Accepted Answer

The answer of Monetary Policy in Flosserland
In Flosserland, the Department...

Question 18

Considering a plot of the inflation rate and the unemployment rate, one might conjecture that the short run Phillips curve was further to the right in the first part of the 2000's than it was in the last part of the 1990s and 2000.
A) If so, this might have been the result of a negative supply shock or an increase in expected inflation.
B) If so, this might been the result of a negative supply shock, or a decrease in expected inflation.
C) If so, this might have been the result of a positive supply shock, or an increase in expected inflation.
D) If so, this might have been the result of a positive supply shock, or a decrease in expected inflation.

Accepted Answer

The answer of Considering a plot of the inflation rate...

Question 19

The monetary-policy framework called inflation targeting is used explicitly by
A) no major country.
B) most major countries except the United States and Japan.
C) the United States, but it is not used by other major countries.
D) most major countries, including the United States and Japan.

Accepted Answer

Most major countries, including Australia, Canada, the Eurozone, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom, use inflation targeting as their monetary-policy framework. However, the United States and Japan do not explicitly use inflation targeting.

Question 20

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008. Given the effects of the financial and housing crisis on the price level and output and the effects of increased world commodity prices on the price level and output, the aggregate demand and aggregate supply model tells us that
A) output rises and the price level falls.
B) output may rise, fall or stay the same and the price level rises.
C) output falls and the price level may rise, fall or stay the same.
D) None of the above is correct.

Accepted Answer

The financial and housing crisis would lead to a decrease in consumption and investment, which would shift the AD curve to the left, causing a decrease in both output and the price level. However, the increase in world commodity prices would cause an increase in production costs and a leftward shift in the SRAS curve, causing a decrease in output and an increase in the price level. Therefore, output falls and the price level may rise, fall or stay the same.

Quiz 17: The Short-Run Tradeoff Between Inflation and Unemployment

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

Other things the same, a country that decides to reduce inflation will

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. In the short run the increased prices of world commodities

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. The effects of the housing and financial crises could be shown by shifting

If a central bank attempts to lower the inflation rate but the public doesn't believe the inflation rate will fall as far as the central bank says, then in the short run unemployment

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to the Economy in 2008. In the short-run the housing and financial crises

If inflation expectations rise, the short-run Phillips curve shifts

Considering a plot of the inflation rate and the unemployment rate, one might conjecture that the short run Phillips curve was further to the right in the first part of the 2000's than it was in the last part of the 1990s and 2000.

The monetary-policy framework called inflation targeting is used explicitly by