Deck 27: Issues in Macroeconomic Theory and Policy

Question 1

Activists believe that monetary and fiscal policy will only work if it comes as a surprise to the public.

Answer 1

False

Question 2

Indexing reduces the ability for relative price changes to allocate resources where they are more valuable.

Answer 2

True

Question 3

Using Taylor rule,the federal funds rate is increased or decreased according to what is happening to both real GDP and inflation.

Answer 3

True

Question 4

A positive supply shock causes a leftward shift in the SRAS curve.

Question 5

In the short run,the Phillips Curve indicates a(n):

A) inverse relationship between inflation and unemployment.
B) direct relationship between inflation and unemployment.
C) inverse relationship between GDP and unemployment.
D) direct relationship between GDP and unemployment.

Question 6

Assuming wages are indexed to inflation,if prices rose by 1.4 percent this month and your last month's wage was $1,000,your wage this month would be $1,014.

Question 7

According to Milton Friedman,the short-run trade-off between unemployment and inflation comes from unanticipated inflation.

Question 8

Critics of inflation targeting will argue that central banks need flexibility.

Question 9

Critics of the extreme rational expectations theory argue that wages and input prices do not adjust instantaneously.

Question 10

Proponents of the monetary rule believe that a constant growth rate in the money supply will lead to less uncertainty and greater credibility.

Question 11

The short-run Phillips curve is downward sloping but the long-run is a vertical line.

Question 12

Critics of targeting a zero inflation rate believe that achieving zero inflation is almost
impossible and the costs are too high.

Question 13

Rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

Question 14

Rules advocates believe that the central bank should change interest rates in an attempt to fine tune the economy.

Question 15

The natural rate hypothesis suggests that improvements in technology that occur normally during the course of time will lead the economy to the natural rate of unemployment.

Question 16

The Phillips Curve is steeper at higher rates of inflation and lower levels of unemployment.

Question 17

If people expect economic fluctuations to be permanent and caused primarily by supply-side shifts,then the result is likely to be a positive relationship between the inflation rate and the unemployment rate.

Question 18

The Phillips curve relationship can also be seen indirectly from the AD/AS model.

Question 19

When expansionary policy is unanticipated,it leads to a short-run expansion in output and employment.

Question 20

Some economists believe that inflation could actually help reduce unemployment in the short-run.

Question 21

If the economy has substantial unemployment,then the inflationary costs of expansionary policy are likely to be:

A) low, and the unemployment gains minimal.
B) low, and the unemployment gains large.
C) high, and the unemployment gains minimal.
D) high, and the unemployment gains large.

Question 22

At lower rates of inflation and higher rates of unemployment,the slope of the Phillips curve is

A) very steep.
B) vertical.
C) horizontal.
D) less steep.

Question 23

In the 1960s and early 70s,economists believed that the Phillips curve indicated:

A) a menu of macroeconomic choices available to policy makers.
B) that higher levels of employment could be achieved with lower inflation.
C) that higher inflation was the price for more unemployment.
D) all of the above.

Question 24

If the economy is fully employed,then the inflationary costs of expansionary policy are likely to be:

A) low, and the unemployment gains minimal.
B) low, and the unemployment gains large.
C) high, and the unemployment gains minimal.
D) high, and the unemployment gains large.

Question 25

If policy makers expand aggregate demand,they can lower unemployment ____,but only by ____.

A) temporarily; decreasing inflation
B) temporarily; increasing inflation
C) permanently; decreasing inflation
D) permanently; increasing inflation

Question 26

The novelty of Phillips' article was his finding of a ____ correlation between ____ and ____.

A) positive; unemployment; the interest rate
B) negative; inflation; the exchange rate
C) negative; unemployment; inflation
D) positive; the rate of growth of the money supply; inflation

Question 27

The short-run Phillips curve suggests that ____ rates of unemployment can be traded off for ____ rates of inflation.

A) lower; higher
B) greater; relatively high
C) less; relatively low
D) less; relatively high

Question 28

At low rates of unemployment the Phillips curve becomes:

A) quite flat.
B) unitary elastic.
C) a positive relationship.
D) very steep.

Question 29

The short-run Phillips curve is based on the assumption of:

A) a direct relationship between the inflation rate and unemployment.
B) an inverse relationship between the inflation rate and unemployment.
C) no relationship between the inflation rate and unemployment.
D) a permanent trade-off between the inflation rate and unemployment.

Question 30

When the economy is already operating at nearly full capacity,further fiscal or monetary stimulus will likely:

A) soften inflationary pressures in sectors already at capacity, and increasing employment in sectors with excess capacity.
B) trigger inflationary pressures in sectors already at capacity, and decreasing employment in sectors with excess capacity.
C) soften inflationary pressures in sectors already at capacity, and decreasing employment in sectors with excess capacity.
D) trigger inflationary pressures in sectors already at capacity, and increasing employment in sectors with excess capacity.

Question 31

What does a vertical Phillips curve in the long run imply?

A) In the long run, the rate of unemployment will converge toward zero.
B) Higher inflation does not permanently reduce the rate of unemployment.
C) Higher inflation increases the rate of unemployment.
D) Higher inflation lowers the rate of unemployment.

Question 32

If the Phillips curve was nearly horizontal,a:

A) substantial increase in inflation would be caused by a decrease in unemployment.
B) substantial decrease in inflation would be caused by a decrease in unemployment.
C) substantial decrease in unemployment could be achieved with only a small increase in inflation.
D) substantial increase in unemployment could be achieved with only a small increase in inflation.

Question 33

The cost of maintaining unemployment below its natural rate with expansionary government policy is:

A) increasing inflation.
B) decreasing inflation.
C) always a larger federal deficit.
D) always a smaller federal deficit.

Question 34

According to economist Milton Friedman,

A) the short-term validity of the Phillips curve is questionable.
B) there might be a short-term trade-off between unemployment and inflation but not a permanent trade-off.
C) trade-off happens between unemployment and inflation happens in the long run but not in the short run.
D) the long-run trade-off between unemployment and inflation comes from unanticipated inflation.

Question 35

According to the Phillips curve analysis,if policy makers reduce aggregate demand growth,they can lower inflation,but only at the cost of a:

A) permanent increase in the natural rate of unemployment.
B) permanent increase in the actual unemployment rate.
C) temporary increase in unemployment.
D) temporary decrease in the natural level of unemployment.

Question 36

For the short-run Phillips curve to remain relatively stable,then changes in real GDP must occur primarily as a result of shifts in:

A) changes in aggregate demand.
B) changes in real wages caused by changes in the supply of labor.
C) changes in inflationary expectations.
D) changes in aggregate supply.

Question 37

If the short-run Phillips curve has a very shallow (or flat)slope,

A) the self-correcting mechanism cannot work.
B) the structural deficit will grow in a recession.
C) the structural deficit will fall in a recession.
D) the inflation costs of reducing unemployment are fairly low.

Question 38

If the economy is experiencing lower levels of unemployment,the short-run Phillips curve suggests that ____ additional employment can be purchased at ____ rates of inflation.

A) greater; relatively low
B) greater; higher
C) lower; lower
D) No such employment-inflation relationship is suggested by the Phillips curve.

Question 39

A.H.Phillips developed the Phillips curve concept by looking at the relationship between:

A)inflation and unemployment.
B)wages and employment.
C)wage inflation and monetary policy.
D)inflation and output.

Question 40

If the short-run Phillips curve was a straight line with a very steep slope,the inflation costs of reducing unemployment:

A) are fairly low.
B) are fairly high.
C) depend on the current rate of inflation.
D) rises as the economy approaches full employment.

Question 41

Which of the following is true?

A) Inflation and unemployment rates can both increase in the short run in response to positive supply shocks.
B) Inflation and unemployment rates can both decrease in the short run in response to reduced aggregate demand.
C) Inflation and unemployment rates can both decrease in the short run in response to positive supply shocks.
D) The short-run Phillips curve relationship appears to be relatively stable over time.

Question 42

If the short-run aggregate supply curve is shifting right:

A) the short-run Phillips curve is shifting left.
B) the short-run Phillips curve is shifting right.
C) the long-run Phillips curve is shifting right.
D) the long-run Phillips curve is shifting left.

Question 43

If the short-run aggregate supply curve is shifting left:

A) the short-run Phillips curve is shifting left.
B) the short-run Phillips curve is shifting right.
C) the long-run Phillips curve is shifting right.
D) the long-run Phillips curve is shifting left.

Question 44

Which of the following would shift the short-run Phillips curve to the right?

A) an negative supply shock
B) an increase in inflationary expectations
C) a decrease in inflationary expectations
D) either (a) or (b).

Question 45

Higher than expected inflation rate:

A) shifts short-run Phillips curve to the right.
B) shifts long-run Phillips curve to the right.
C) shifts both short-run and long-run Phillips curve to the right.
D) shifts short-run Phillips curve to the left.

Question 46

If the inflation rate is decreasing while unemployment is increasing:

A) the short-run Phillips curve must have shifted right.
B) the short-run Phillips curve must have shifted left.
C) it must have involved a movement along the short-run Phillips curve
D) it would be inconsistent with any possible Phillips curve scenario.

Question 47

Which of the following is true?

A) Inflation and unemployment rates can both increase in the short run in response to positive supply shocks.
B) Inflation and unemployment rates can both decrease in the short run in response to reduced aggregate demand.
C) Inflation and unemployment rates can both decrease in the short run in response to negative supply shocks.
D) none of the above

Question 48

Which of the following would shift the short-run Phillips curve to the left?

A) a positive supply shock
B) an increase in inflationary expectations
C) an negative supply shock
D) either (a) or (c).

Question 49

Which of the following is true?

A) Inflation and unemployment rates can both increase in the short run in response to negative supply shocks.
B) Inflation and unemployment rates cannot both decrease in the short run in response to reduced aggregate demand.
C) Inflation and unemployment rates can both decrease in the short run in response to positive supply shocks.
D) All of the above are true.

Question 50

Which of the following is true?

A) Inflation and unemployment rates can both decrease in the short run in response to negative supply shocks.
B) Inflation and unemployment rates cannot both increase or both decrease in the short run in response to changes in aggregate demand.
C) Inflation and unemployment rates can both increase in the short run in response to positive supply shocks.
D) All of the above are true.

Question 51

The short-run Phillips curve will tend to shift during any period when:

A) aggregate supply changes.
B) real wages or input prices change because of changes in the supplies of labor or other inputs.
C) inflationary expectations change.
D) all of the above

Question 52

Which of the following would shift the short-run Phillips curve?

A) an negative supply shock
B) an increase in inflationary expectations
C) a decrease in inflationary expectations
D) All of the above.

Question 53

As the economy moves down and to the left along a short-run aggregate supply curve,it:

A) moves up and to the right along the short-run Phillips curve.
B) moves up and to the left along the short-run Phillips curve.
C) moves down and to the left along the short-run Phillips curve.
D) moves down and to the right along the short-run Phillips curve.

Question 54

If the level of unemployment is below the natural rate of unemployment,it would be expected that:

A) the short-run Phillips curve will shift leftward, as inflationary expectations adjust.
B) the inflation rate will increase.
C) the inflation rate will decrease.
D) the long-run Phillips curve will shift rightward, as inflationary expectations adjust.

Question 55

When expectations of inflation are revised downward,the short-run Phillips curve:

A) shifts rightward.
B) becomes steeper.
C) shifts leftward.
D) becomes flatter.

Question 56

The short-run Phillips curve could shift to the left as a result of either ____ or ____.

A) rising oil prices; increasing inflation expectations
B) rising wages; falling prices
C) declining oil prices; falling inflation expectations
D) falling wages; rising prices

Question 57

Lower than expected inflation rate:

A) shifts short-run Phillips curve to the right.
B) shifts short-run Phillips curve to the left.
C) shifts both short-run and long-run Phillips curve to the right.
D) shifts both short-run and long-run Phillips curve to the left.

Question 58

If inflationary expectations are stable and there is no current inflation,the short-run Phillips curve will intersect the long-run Phillips curve at:

A) a 0 percent unemployment rate.
B) a 2 percent unemployment rate.
C) a 4 percent unemployment rate.
D) the natural rate of unemployment.

Question 59

If the inflation rate is decreasing while unemployment is decreasing:

A) the short-run Phillips curve must have shifted right.
B) the short-run Phillips curve must have shifted left.
C) it involved a movement along the short-run Phillips curve
D) it would be inconsistent with any possible Phillips curve scenario.

Question 60

If the level of unemployment is above the natural rate of unemployment,it would be expected that:

A) the short-run Phillips curve will shift leftward, as inflationary expectations adjust.
B) the inflation rate will increase.
C) the short-run Phillips curve will shift rightward, as inflationary expectations adjust.
D) both b. and c.

Question 61

If inflation is underestimated by decision makers in the economy when it is rising,the SRAS curve will tend to be:

A) vertical.
B) horizontal.
C) downward sloping.
D) upward sloping.

Question 62

When expectations of inflation are revised upward,the short-run Phillips curve:

A) shifts rightward.
B) becomes steeper.
C) shifts leftward.
D) becomes flatter.

Question 63

If the actual unemployment rate is less than the natural rate of unemployment,there will be a tendency toward:

A) increased inflation and a leftward shift of the short-run Phillips curve.
B) decreased inflation and a rightward shift of the short-run Phillips curve.
C) increased inflation and a rightward shift of the short-run Phillips curve.
D) decreased inflation and a leftward shift of the short-run Phillips curve.

Question 64

Rational expectations are:

A) forecasts that are technically correct.
B) forecasts that, while not necessarily correct, are the best that can be made given the available data.
C) forecasts that accurately predict the short-term future for wages and prices.
D) forecasts made by economists based on sophisticated econometric models.

Question 65

Exhibit 27-1 Refer to Exhibit 27-1.If an increase in aggregate demand AD₀ to AD₁ is fully anticipated,the economy will move from point A to point ____ in the short run.

A) B
B) C
C) D
D) E

Question 66

Exhibit 27-1 Refer to Exhibit 27-1.If an increase in aggregate demand AD₀ to AD₁ is unanticipated,the economy will move from point A to point ____ in the short run.

A) A
B) B
C) E
D) F

Question 67

If employees and employers always accurately forecast inflation,what is the shape of the Phillips curve?

A) It is vertical in the short run, and upward sloping in the long run.
B) It is downward sloping in the short run, and vertical in the long run.
C) It is upward sloping in the short run, and horizontal in the long run.
D) It is vertical in the short run and long run.

Question 68

According to the rational expectation view,the government can change real output:

A) with appropriate, well-publicized fiscal and monetary policies.
B) with appropriate, well-publicized fiscal and monetary policies in the short run, but not in the long run.
C) only by making unexpected changes in aggregate demand.
D) without ever affecting the price level.

Question 69

If expectations are rational,how can government influence unemployment in a predictable way?

A) with the normal tools, used in the normal fashion
B) with fiscal policy; monetary policy will not work
C) with monetary policy; fiscal policy will not work
D) with surprise changes in policy only

Question 70

In the rational expectation model,government control over aggregate demand:

A) gives it the power to alter real output and employment even when the effects of government policies are expected.
B) can affect real output in the short-run only if policies are unexpected.
C) has potential to change long-run real output as long as the aggregate supply curve is vertical.
D) has highly unpredictable effects on real output in the long run.

Question 71

According to the natural rate hypothesis:

A) a short-term as well as long-term trade-off exists between unemployment and inflation.
B) economic fluctuations are the result of external negative and positive productivity shocks to the economy
C) workers and consumers incorporate the likely consequences of government policy changes into their expectations by quickly adjusting wages and prices.
D) the economy will self-correct to the natural rate of unemployment.

Question 72

According to the rational expectation view,does the government have the ability to control the level of real output and unemployment?

A) Only in the SR if it makes unexpected changes in aggregate demand.
B) Only in the SR if it announces plans well in advance, so that expectations are affected.
C) Only in the LR if it shifts AS instead of AD.
D) Only in the LR if it uses monetary policy instead of fiscal policy.

Question 73

Which of the following statements was probably made by an adherent of rational expectations?

A) It is rational to pursue any full employment policy because more employment is better than less.
B) Unemployment is clearly a case of market failure.
C) Programs designed to stimulate employment will only stimulate the price level with no employment gain.
D) It is inhumane to have a single person unemployed whatever the inflation cost.

Question 74

Many economists think that,in the long run,the economy generally tends to move toward:

A) an accelerating inflation rate.
B) a stable price level.
C) the natural or full-employment rate of inflation.
D) the natural or full-employment rate of unemployment.

Question 75

A decrease in the expected level of inflation will cause short-run aggregate supply to ____ and the short-run Phillips curve to ____.

A) shift left; shift right
B) shift left; shift left
C) shift right; shift right
D) shift right; shift left

Question 76

If expectations are rational,the difference between the actual inflation rate and the forecast for inflation is:

A) positive when inflation is increasing.
B) negative when inflation is increasing.
C) random.
D) greater, the more accurately people anticipate the effects of government policy.

Question 77

If expectations are rational,can monetary and fiscal policy makers accurately control the effects their policies have on unemployment?

A) Yes, provided they announce policies in advance.
B) Yes, both policies are effective in altering unemployment in the desired ways.
C) No, because these effects depend on whether and to what extent people are fooled by those policies.
D) No, only fiscal policy can alter unemployment.

Question 78

Believers in the hypothesis of rational expectations argue that:

A) expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
B) a trade-off exists between unemployment and inflation even in the long run.
C) the Phillips curve is vertical even in the short run for expected changes in inflation.
D) the Phillips curve is downward sloping even in the long run.

Question 79

If inflation rises or falls faster than people forecast in the short run but not in the long run,what are the shapes of the Phillips curves?

A) The Phillips curve is vertical in the short run, and upward sloping in the long run.
B) The Phillips curve is downward sloping in the short run, and vertical in the long run.
C) The Phillips curve is upward sloping in the short run, and horizontal in the long run.
D) The Phillips curve is vertical in the short run and long run.

Question 80

According to the theory of rational expectations,when it comes to expected changes in the inflation rate,the short-run Phillips curve would be:

A) vertical.
B) horizontal.
C) upward sloping.
D) downward sloping.