Deck 30: Inflation and Disinflation

Question 1

The sacrifice ratio is calculated by

A)dividing the cumulative loss of real GDP (as a percentage of potential GDP)due to disinflation by the number of percentage points by which inflation fell.
B)adding the cumulative loss of real GDP (as a percentage of potential GDP)due to disinflation to the number of percentage points by which unemployment exceeds the NAIRU.
C)dividing the cumulative loss of potential GDP (as a percentage of actual GDP)due to disinflation by the number of percentage points by which inflation fell.
D)dividing the number unemployed by the labour force.
E)dividing the number employed by the labour force.

Answer 1

A

Question 2

If the unemployment rate is less than the NAIRU,

A)there will be downward pressure on wages.
B)demand forces will exert upward pressure on wages.
C)there is a recessionary output gap.
D)the AS curve will shift downward.
E)there is no pressure on the AS curve to shift.

Answer 2

B

Question 3

The act of "monetary validation" by a central bank can

A)increase unemployment.
B)perpetuate inflation.
C)cause a supply shock.
D)act to reduce inflation.
E)no longer be carried out by the Bank of Canada .

Answer 3

B

Question 4

In general, the sacrifice ratio will be greater, the

A)longer it takes to revise inflationary expectations downwards.
B)shorter it takes to revise inflationary expectations downwards.
C)shorter it takes to revise inflationary expectations upwards.
D)longer it takes to revise inflationary expectations upwards.
E)lower is the rate of unemployment.

Question 5

A contractionary monetary policy that has been imposed to reduce inflation will most likely

A)lead to a recession that is long and severe, under any circumstances.
B)have no effect on the short- run level of GDP and unemployment.
C)not control inflation, since money supply changes have little or no effect on the price level.
D)lead to a recession which will be short if inflation expectations adjust rapidly and accurately.
E)produce long- lasting unemployment if wages adjust rapidly.

Question 6

Suppose the current inflation rate is 4 percent and the Bank of Canada wants to reduce it to 2 percent, knowing that the sacrifice ratio is 2. Apparently, the Bank of Canada is prepared to accept a decline of real GDP of as the cost of disinflation.

A)2 percent of potential output.
B)0.5 percent of potential output.
C)8 percent of potential output.
D)1 percent of potential output.
E)4 percent of potential output.

Question 7

Suppose the NAIRU for Canada is 6 percent, the actual unemployment rate is 7 percent, and productivity is constant. We can conclude that

A)there is an inflationary gap.
B)the excess supply of labour will put downward pressure on wages.
C)the AD curve will automatically shift up.
D)the NAIRU will readjust to 7 percent.
E)the excess demand for labour will put upward pressure on wages.

Question 8

When a central bank attempts to stop a sustained inflation, it tries to remove the inflationary gap by

A)taking no action and allowing the market to correct itself.
B)increasing the outward shift of the AD curve.
C)shifting the AS curve upward.
D)stopping the outward shift of the AD curve.
E)shifting the AS curve downward.

Question 9

Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant. This scenario will eventually lead to

A)a permanent decrease in output.
B)a reduction in wages and a downward shift of the AS curve.
C)an increase in wages and an upward shift of the AS curve.
D)increased transactions demand for money, and a higher rate of interest.
E)the emergence of an inflationary gap.

Question 10

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil. If the Bank of Canada reduces the overnight interest rate in response to this increase in AD, this is called

A)monetary validation.
B)an adjustment process.
C)a demand shock.
D)demand inflation.
E)a supply shock.

Question 11

The reason that some economists advise central banks to never validate a negative supply shock is

A)because the economy's adjustment process is ineffective.
B)that there are no short- run effects on any real variables, and so it is not worthwhile.
C)the monetary validation results in a higher level of unemployment.
D)the monetary validation causes downward pressure on wages.
E)to avoid the possibility of entrenching expectations and creating a wage- price spiral.

Question 12

Which of the following is consistent with constant inflation: expected future inflation of , output- gap inflation of , and supply- shock inflation .

A)2%; 2%; 2%
B)1%; 1%; 1%
C)2%; 0%; 0%
D)2%; 0%; - 2%
E)0%; 0%; - 2%

Question 13

A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will

A)increase both GDP and the price level.
B)reduce GDP but have an uncertain effect on the price level.
C)reduce the price level but have an uncertain effect on GDP.
D)increase the price level but have an uncertain effect on GDP.
E)increase GDP but have an uncertain effect on the price level.

Question 14

The process of disinflation can involve some period of increased inflation and reduced output. Economists refer to this as

A)stagflation.
B)the recovery phase.
C)monetary validation.
D)the sacrifice period.
E)an inflationary recession.

Question 15

At the end of the 1970s, the inflation rate in Canada had exceeded 10 percent. This high inflation was due mainly to

A)a substantial supply shock caused by a large increase in the world price of oil.
B)steadily decreasing factor prices.
C)external pressures on the Canadian dollar.
D)the extremely high wage increases being won by strong labour unions.
E)steadily decreasing factor prices and a contractionary monetary policy.

Question 16

A constant inflation in the AD/AS macro model is only possible when

A)AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate.
B)AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate.
C)AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate.
D)AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate.
E)none of the above - constant inflation is not possible.

Question 17

A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in

A)a reduction in unemployment and an uncertain effect on the price level.
B)a reduction in the price level and an uncertain effect on unemployment.
C)an increase in unemployment and an uncertain effect on the price level.
D)an increase the price level and an uncertain effect on unemployment.
E)a reduction in both unemployment and the price level.

Question 18

Suppose the NAIRU for Canada is 6.5 percent, and the actual unemployment rate is 5 percent. If the Bank of Canada reduces its target for the overnight interest rate,

A)it will increase the unemployment rate.
B)the AS curve will shift upward.
C)it will move real GDP back toward potential GDP.
D)the AD curve will shift to the left.
E)it will worsen the existing inflationary gap.

Question 19

Assume that an economy is currently in long- run equilibrium at its potential output and that it is subjected to a positive demand shock. When the economy moves back to producing its potential level of national income, the price level will be

A)equal to what it was originally before the demand shock.
B)lower than it was in the short- run equilibrium but higher than it was originally.
C)lower than it was in short- run equilibrium and the lower than it was originally.
D)higher than it was in the short- run equilibrium but lower than it was originally.
E)higher than it was in the short- run equilibrium and even higher than it was originally.

Question 20

In general, the sacrifice ratio will be smaller, the

A)shorter it takes to revise inflationary expectations downwards.
B)longer it takes to revise inflationary expectations downwards.
C)sacrifice ratio will be the same always.
D)shorter it takes to revise inflationary expectations upwards.
E)longer it takes to revise inflationary expectations upwards.

Question 21

If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect

A)an inflationary gap.
B)peace in labour- management relations.
C)a shrinking output gap.
D)rising unemployment until the wage increases cease, or are offset by other wage decreases.
E)a one- time rise in the price level.

Question 22

One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that

A)inflation fell dramatically and real GDP remained at full employment levels.
B)inflation remained over 10 percent, but the Bank of Canada avoided a major recession.
C)inflation fell dramatically, but was accompanied by a major recession.
D)inflation remained over 10 percent and there was a major recession.
E)unemployment fell, but inflation accelerated due to higher interest rates.

Question 23

Suppose policymakers are faced with ending a sustained inflation. They must weigh the future benefits of against the immediate costs of .

A)a higher rate of economic growth; reduced output
B)lower rate of economic growth; lower inflation
C)lower inflation; reduced output and higher unemployment
D)a higher real GDP; lower inflation
E)lower inflation; administering the policy

Question 24

For the economy of Canada, a major oil user and exporter, a decrease in the world price of oil would be considered

A)both a positive demand shock and a negative supply shock.
B)a negative demand and a negative supply shock.
C)a negative demand shock only.
D)both a negative demand shock and a positive supply shock.
E)a negative supply shock only.

Question 25

If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with

A)continuous inflation.
B)alternating periods of inflation and deflation.
C)a one- time decrease in prices.
D)a one- time increase in prices.
E)steady reductions in real output.

Question 26

The Bank of Canada has formally adopted an inflation target of 2 percent. One important reason for this is

A)that economists have determined that only an inflation rate of 2 percent is consistent with NAIRU.
B)to allow for a permanent inflationary gap which is beneficial to the economy.
C)the supply- shock inflation will never exceed this amount.
D)that output- gap inflation will never exceed this amount.
E)to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation.

Question 27

Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will

A)worsen any existing unemployment problem.
B)eventually subside unless accompanied by expansionary monetary policy.
C)cause Y to fall below Y*.
D)permanently increase output.
E)initiate a wage- price spiral.

Question 28

Assuming that the economy is currently in a long- run equilibrium at Y^*, a negative aggregate demand shock with no change in the money supply will eventually result in

A)an ongoing inflation in the economy.
B)a lower price level and GDP below potential output.
C)no change in the price level.
D)a higher price level and GDP at potential GDP.
E)a lower price level and GDP at its potential level.

Question 29

The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the

A)AS curve to continue shifting upward.
B)AD curve to shift too far to the right.
C)AD curve to shift too far to the left.
D)AD curve to continue shifting to the right.
E)AS curve to continue shifting downward.

Question 30

Suppose economists were able to measure frictional unemployment as 3 percent, cyclical unemployment as 2 percent, and structural unemployment as 4 percent. Then we would know that

A)Y is below Y* and there is downward pressure on wages.
B)Y is above Y* and there is upward pressure on wages.
C)Y is equal to Y* and there is no pressure on wages.
D)Y is above Y* and there is downward pressure on wages.
E)Y is below Y* and there is upward pressure on wages.

Question 31

In the AD/AS model with a sustained and constant inflation,

A)there is no effective set of monetary policy tools to reduce inflation.
B)expected inflation tends to be significantly less than actual inflation.
C)there is a tendency for the price of bonds to be increasing rapidly.
D)the AS curve is shifting upward because of inflation expectations.
E)the AD curve is not shifting at all.

Question 32

If the Bank of Canada validates a positive AD shock,

A)there is the risk of continued inflation.
B)the AD curve will shift to the left and inflation will stop.
C)it will have eliminated the possibility of a continued inflation.
D)output will fall more rapidly than if the shock had not been validated.
E)wages will fall to reduce the resulting unemployment.

Question 33

The statement that "inflation is everywhere and always a monetary phenomenon" is closely associated with

A)Adam Smith.
B)John Maynard Keynes.
C)Milton Friedman.
D)David Dodge.
E)John Crow.

Question 34

According to the "acceleration hypothesis", the inflation rate will accelerate when actual output is held

A)above potential output.
B)at the NAIRU.
C)at the level where unemployment is at the natural rate.
D)at potential output.
E)below potential output.

Question 35

Consider an economy without any supply shocks. If the expected inflation rate is 3 percent and the actual inflation rate is also 3 percent, then

A)the economy cannot be in a short- run equilibrium.
B)real GDP must be more than potential GDP.
C)real GDP must be less than potential GDP.
D)real GDP must be equal to potential GDP.
E)we can deduce nothing about the level of GDP.

Question 36

If the NAIRU is 8 percent and the actual unemployment rate is 5 percent,

A)it will get stuck there permanently.
B)there is a recessionary gap.
C)there is no pressure on the AS curve to shift.
D)the AS curve will shift downward.
E)demand forces put upward pressure on wages.

Question 37

The view that sustained inflation is possible only with continuous monetary validation is now widely accepted but was made famous by and is still closely associated with

A)John Maynard Keynes.
B)James Tobin.
C)Adam Smith.
D)David Ricardo.
E)Milton Friedman.

Question 38

Suppose economists were able to measure frictional unemployment as 3 percent, cyclical unemployment as 2 percent, and structural unemployment as 4 percent. Then we would know that the NAIRU is and the actual unemployment rate is .

A)6 percent; 5 percent
B)5 percent; 9 percent
C)7 percent; 9 percent
D)6 percent; 6 percent
E)7 percent; 7 percent

Question 39

The Phillips curve originally appeared to demonstrate a trade- off between inflation and unemployment. This was later thought to be deficient because

A)the effects of fiscal policy on aggregate demand had not been incorporated.
B)changes in unemployment had not been incorporated.
C)it was later recognized that inflation and unemployment were unrelated.
D)the influence on aggregate demand had not been incorporated.
E)inflationary expectations had not been incorporated.

Question 40

It is often said that inflation is a "monetary phenomenon." The most accurate interpretation of this phrase is that

A)increases in the price level are always associated with increases in the money supply.
B)a continuous rise in prices is possible only with continuing increases in the money supply.
C)the price level cannot rise without an increase in the money supply.
D)repeated supply shocks cannot drive up prices if there is no monetary validation.
E)only an increase in the money supply can start a period of inflation.

Question 41

Suppose the NAIRU for Canada is 6.5 percent, the actual unemployment rate is 5 percent and productivity is constant. We can conclude that

A)the excess demand for labour will put upward pressure on wages.
B)the NAIRU will re- adjust to 5 percent.
C)the AD curve will automatically shift up.
D)there is a recessionary gap.
E)the excess supply of labour will put downward pressure on wages.

Question 42

Of the three phases of a disinflation, the first phase consists of the central bank

A)directing its monetary policy to achieve a stable exchange rate.
B)directing its monetary policy to reduce the unemployment rate.
C)pursuing an expansionary monetary policy.
D)directing its monetary policy to reduce the overnight interest rate.
E)slowing the rate of monetary expansion.

Question 43

Which of the following would be expected to cause a sustained increase in the inflation rate rather than a once- and- for- all increase in the price level?

A)a new payroll tax that raises unit wage costs
B)an early frost that damages the agricultural harvest
C)the sudden doubling of a key raw materials price
D)expectations of higher future inflation
E)the imposition of a new sales tax

Question 44

If there is repeated monetary validation to wage- push supply shocks,

A)workers will have higher real wages.
B)there will be a once- and- for- all rise in the price level.
C)the supply shocks will reverse themselves.
D)there will be ongoing inflation.
E)unemployment will continue to rise.

Question 45

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

A)if expected inflation is positive but constant.
B)in the short run.
C)independent of the economy's adjustment process.
D)in the long run.
E)if there is no monetary validation.

Question 46

Consider the statement "Inflation is everywhere and always a monetary phenomenon". This statement does not hold true

A)as long as demand and supply shocks are validated by expansionary monetary policy.
B)as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left.
C)if the economy's adjustment process is working effectively.
D)in industrialized economies.
E)for temporary bursts of inflation that are not accompanied by a monetary expansion.

Question 47

Consider an economy that is in the process of a disinflation. Suppose that over a 2- year period, the rate of inflation is reduced from 6 percent to 1 percent. Over this same time, the cumulative loss in real GDP is $30 billion. Potential GDP is $600 billion. What is the sacrifice ratio?

A)1
B)2
C)3
D)4
E)5

Question 48

Inflationary pressures that result from a rightward shift in the AD curve

A)will initiate a wage- price spiral.
B)cause Y to fall below Y^*.
C)will permanently increase output.
D)will worsen any existing unemployment problem.
E)will eventually subside unless accompanied by an increase in the money supply.

Question 49

If the unemployment rate is greater than the NAIRU,

A)there is an inflationary gap.
B)real national income is above potential GDP.
C)there is a negative output gap.
D)there will be upward pressure on wages.
E)the AS curve will shift upward.

Question 50

Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times". If the Bank of Canada does so by implementing an expansionary monetary policy, it would

A)decrease the actual inflation rate.
B)cause a temporary drop in inflation.
C)be acting to de- stabilize the economy.
D)decrease employment.
E)cause a permanent recessionary gap.

Question 51

Assuming that the economy is currently in a long- run equilibrium with real GDP equal to Y^*, a positive AD shock (with no change in the money supply)will eventually result in

A)a higher price level and GDP at its potential level.
B)a lower price level and GDP at its potential level.
C)an ongoing inflation in the economy.
D)a lower price level and GDP below its potential level.
E)no change in the price level.

Question 52

A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will

A)reduce the price level but have an uncertain effect on unemployment.
B)reduce unemployment but have an uncertain effect on the price level.
C)increase the price level but have an uncertain effect on unemployment.
D)increase unemployment but have an uncertain effect on the price level.
E)increase both the price level and unemployment.

Question 53

The sacrifice ratio reflects the cost of as measured by the .

A)supply shocks; change in the price level
B)disinflation; loss in economic activity
C)inflationary expectations; change in the rate of inflation
D)the Phillips curve; change in the NAIRU
E)validation; change in inflationary expectations

Question 54

A constant inflation rate can be illustrated by the AD curve shifting upward

A)faster than aggregate supply shifts upward.
B)with no shifts in aggregate supply.
C)at the same rate as aggregate supply shifts downward.
D)at the same rate as aggregate supply shifts upward.
E)faster than aggregate supply shifts downward.

Question 55

is not directly a monetary cause of inflation.

A)2 only
B)1 and 2
C)2 and 3
D)1 only
E)3 only

Question 56

Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy. This scenario will lead to

A)a permanent decrease in output.
B)the emergence of a recessionary gap.
C)a wage- price spiral.
D)reduced transactions demand for money, an increase in the price of bonds, and a lower rate of interest.
E)an increase in wages and an upward shift of the AS curve.

Question 57

Consider an economy that is in the process of a disinflation. If the sacrifice ratio is 3, then

A)it costs 3 percent of GDP to reduce inflation by one percentage point.
B)unemployment increases by 3 percent during the period of disinflation
C)the cumulative loss of output in the economy will reach a total of 3 percent.
D)unemployment increases by 3 percent for every one percent reduction in inflation.
E)the costs of disinflation are 3 times the benefits of disinflation.

Question 58

A central bank might decide to "validate" a negative supply shock because

A)the economy might suffer a long slump before wages and prices fall enough to restore full employment.
B)there is no other way to return the economy to full employment.
C)there are no negative effects from this policy action.
D)central banks tend to pay little heed to inflation.
E)it is an effective means of preventing inflation.

Question 59

It is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation because inflationary expectations cause the

A)AD curve to shift too far to the left.
B)AD curve to shift too far to the right.
C)AS curve to continue shifting upward.
D)AS curve to continue shifting downward.
E)AD curve to continue shifting to the right.

Question 60

Canada's actual rate of inflation is fairly constant around the 2 percent level. We can conclude that

A)the economy is consistently experiencing an inflationary gap.
B)the Bank of Canada is accommodating this level of inflation with increases in the money supply.
C)real GDP must be above potential GDP.
D)the expectations about inflation are consistently wrong.
E)real GDP must be below potential GDP because we also have positive unemployment.

Question 61

A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the

A)sacrifice ratio.
B)output gap.
C)misery index.
D)Phillips measure.
E)credibility index.

Question 62

"Demand inflation" refers to

A)the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.
B)the inflation that results from a decrease in net exports.
C)any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation.
D)any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation.
E)only the inflation that results from an expansionary monetary policy.

Question 63

Increases in money wages in the economy are generally the effect of which force(s)?

A)output gap effect plus expectational effect
B)supply- shock inflation
C)output gap effect plus expectational effect minus supply- shock inflation
D)expectational effect
E)output- gap effect

Question 64

Suppose the actual rate of inflation in the economy is 5 percent. If we know that expected inflation is 2 percent, and that output- gap inflation is 1 percent, then we also know that

A)non- wage supply- shock inflation must equal 2 percent.
B)the NAIRU is 5 percent.
C)expected inflation is rising by 2 percent.
D)money wages must be rising by 5 percent.
E)the actual rate of inflation is falling.

Question 65

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6 percent. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by

A)0.
B)+ 12 percent.
C)+ 6 percent.
D)- 6 percent.
E)- 12 percent.

Question 66

"Supply inflation" refers to

A)the increase in the price level that occurs when the excess demand for inputs pushes up input costs.
B)any increase in the price level that results from an upward shift of the AD curve.
C)the increase in the price level that occurs when there is excess supply of factors of production.
D)inflation arising from a shortage of labour.
E)inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production.

Question 67

The acceleration hypothesis states that

A)if a recessionary gap is not closed, unemployment will tend to accelerate.
B)capital investment is the primary cause of inflation.
C)if an economy is growing, inflation will grow at an ever- increasing rate.
D)monetary validation causes inflation.
E)when the central bank holds an inflationary gap constant, inflation will tend to accelerate.

Question 68

Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is

A)the existence of powerful labour unions in Canada.
B)a continued shortage of labour.
C)that wage effects of the inflationary gaps outweigh the wage effects of the recessionary gaps.
D)that the actual unemployment rate is consistently below the NAIRU.
E)the persistent expectation that the price level will increase.

Question 69

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil and no change in Canadian aggregate supply. The short- term effect on the Canadian price level would be called

A)demand inflation.
B)a supply shock.
C)monetary validation.
D)an adjustment process.
E)an oil demand shock.

Question 70

If a central bank is to successfully end a sustained inflation, it is essential that it

A)avoid any loss in national income.
B)avoid any increase in unemployment.
C)maintain the sacrifice ratio at a constant level.
D)do so using a "cold- turkey" approach.
E)change people's expectations of future inflation.

Question 71

Other things being equal, unit costs will rise and the AS curve will shift upward if

A)the government reduces payroll taxes.
B)wages rise.
C)there is a fall in the price of oil.
D)wage and price controls are in effect.
E)wage increases exceed productivity increases.

Question 72

The reason why inflation can persist even after its original causes have been removed is that

A)governments embark on a deficit- cutting program.
B)the Bank of Canada ensures that money- supply growth matches growth in real GDP.
C)workers expect wage increases to match increases in labour productivity.
D)inflationary expectations cause AS to continue shifting upwards.
E)workers are willing to accept wage increases lower than the increase in productivity.

Question 73

Isolated negative aggregate supply shocks, in the absence of monetary validation, will

A)never be self- correcting without government policy to expand the money supply.
B)be self- correcting only if the aggregate demand curve shifts.
C)eventually be self- correcting as wages slowly fall.
D)have no short- run or long- run effects.
E)result in a permanent output gap.

Question 74

A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations

A)make it impossible to reduce aggregate expenditure.
B)keep shifting the AS curve downward.
C)make it impossible to stop the rightward shift of the AD curve.
D)keep shifting the AS curve upward.
E)cannot be influenced by monetary policy.

Question 75

If the central bank uses monetary policy to attempt to hold Y permanently above Y^*,

A)inflation will accelerate over time.
B)it will fail.
C)the AD curve will shift leftward to cure the inflation problem.
D)inflation is not a problem, but unemployment is.
E)inflation can be kept at a low, constant rate.

Question 76

The idea that, in the long run, the Phillips curve is vertical, implying no trade- off between inflation and unemployment, is based on the premise that

A)inflationary expectations do not influence inflation.
B)expectations do not adjust to reflect actual inflation.
C)changes in unemployment do not influence real GDP.
D)inflation and unemployment are unrelated.
E)inflationary expectations fully adjust to actual inflation.

Question 77

Which of the following will lead to sustained inflation?

A)the sudden doubling of a key raw materials price
B)a new payroll tax that raises firms' unit labour costs
C)persistent expectations of continued inflation
D)an early frost that damages the agricultural harvest
E)the imposition of a new sales tax

Question 78

Beginning from a position of long- run equilibrium, an expansionary monetary policy by the Bank of Canada causes:

A)aggregate demand for goods and services to exceed potential output.
B)a fall in the general price level.
C)an increase in the level of potential output.
D)aggregate demand for goods and services to fall short of potential output.
E)an increase in most market interest rates.

Question 79

Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is characterized by

A)the Bank of Canada slowing the rate of monetary expansion.
B)increased inflation with rising output and falling unemployment.
C)the Bank of Canada pursuing an expansionary monetary policy.
D)aggregate output being returned to potential output.
E)stagflation with falling output and continuing inflation.

Question 80

For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be considered

A)a negative supply shock.
B)supply inflation.
C)a positive demand shock.
D)a positive supply shock.
E)a negative demand shock.