Deck 9: Inflation: Its Causes and Cures

Question 1

In 1996,the growth rate of real GDP was 2.46 percent and the inflation rate was 1.94 percent.The growth of nominal GDP was

A)4.4 percent.
B)0.52 percent.
C)3.88 percent.
D)4.92 percent.

Answer 1

4.4 percent.

Question 2

Low inflation rate between 2007 and 2009 was the result of

A)weak aggregate demand and declining oil prices.
B)weak aggregate supply and rising oil prices.
C)rising oil prices and increasing exports.
D)increasing exports and strong dollar.

Answer 2

weak aggregate demand and declining oil prices.

Question 3

The inflation rate,actual employment rate and natural rate of unemployment from 1980 to 1996 indicate that

A)the inflation rate fell when the actual unemployment rate exceeded the natural unemployment rate.
B)the inflation rate increased when the natural rate of unemployment exceeded the actual unemployment rate.
C)during most of this period the inflation rate was falling and the actual unemployment rate exceeded the natural rate of unemployment.
D)All of the above.

Answer 3

All of the above.

Question 4

Figure 8-6

1974-75 and 1980-81 saw the U.S.economy traveling along path ________ in Figure 8-6.

A)D
B)H
C)B
D)F

Question 5

Which of the following countries had the lowest inflation rate from 1980 to the early 1990s?

A)Italy
B)Germany
C)France
D)United Kingdom

Question 6

Which of the following was NOT a beneficial supply shock occurring in the 1990s?

A)falling computer prices
B)the transition to managed health care organizations,i.e.HMOs.
C)a stronger bargaining position for labor
D)increased global competition

Question 7

Figure 8-6

The late 1990s saw the U.S.economy traveling along path ________ in Figure 8-6.

A)D
B)H
C)B
D)F

Question 8

Suppose that members of Congress and the President believe that the natural rate of unemployment is 2% but in fact it is 6%,and employing fiscal policy they increase AD each time unemployment rises above 2%.The underestimation of the natural rate combined with adaptive expectations will

A)lead to continuous inflation by shifts in both AD and SAS.
B)lead to a continuous inflation by a shift in only AD.
C)lead to a continuous inflation by a shift in only SAS.
D)lead to continuous increases in output and unemployment.

Question 9

Continuous inflation in the long run requires repeated ________ shifts of the AD curve caused by a continuous increase in the ________.

A)leftward;government expenditures
B)rightward;nominal money supply
C)inward;nominal money supply
D)None of the above,inflation is primarily a supply side phenomenon.

Question 10

The natural unemployment rate fell in the 1990s in part because of

A)a drop in the fraction of labor force made up of teenagers.
B)an increase in the fraction of the male labor force in prison.
C)the growth in temporary help agencies.
D)All of the above.

Question 11

Productivity growth shocks in 2009 and early 2010 were

A)highly beneficial.
B)highly adverse.
C)moderately beneficial.
D)moderately adverse.

Question 12

In 1991,the growth rate of nominal GDP was 2.97 percent and the growth rate of real GDP was -0.98 percent.The inflation rate was

A)1.99 percent.
B)2.91 percent.
C)2.97 percent.
D)3.95 percent.

Question 13

After a period of sustained unexpected inflation,it is likely that the renegotiation of nominal wages will

A)shift the SAS curve downward thereby increasing output.
B)shift the SAS curve upward thereby increasing output.
C)shift the SAS curve upward thereby decreasing output.
D)shift the AD curve downward thereby increasing output.

Question 14

Under the European Monetary System,a country's export prices

A)decreased if the inflation rate in that country increased.
B)could be controlled by loosening domestic monetary policy.
C)became more competitive as long as that country accelerated its domestic inflation and kept its foreign exchange rate with the deutsche mark stable.
D)none of the above.

Question 15

Supply inflation is triggered by changes in

A)the prices of imported goods.
B)wages as expected inflation catches up with actual inflation.
C)wages due to the current value of (Y/YN).
D)business costs unrelated to prior changes in nominal GDP growth.

Question 16

The European Monetary System

A)led to resurgent inflation in the 1980s.
B)gave a competitive trade advantage to countries with high inflation rates.
C)required members to keep their exchange rates within a narrow band around the German currency.
D)All of the above.

Question 17

Supply shocks in the 1990s

A)reduced the natural rate of unemployment.
B)helped hold down inflation.
C)had the opposite effect on the economy from the supply shocks of the 1970s.
D)All of the above.

Question 18

Low inflation rate in the late 1990 is caused by all of the following EXCEPT

A)fall in oil prices.
B)dollar appreciation.
C)productivity growth.
D)pricking of the asset bubble.

Question 19

Continuous inflation requires repeated ________ shifts of the SAS curve,accompanied by continuous ________ of price expectations.

A)leftward;upward adjustments
B)rightward;downward adjustments
C)inward;downward adjustments
D)None of the above,inflation is primarily a demand side phenomenon.

Question 20

Figure 8-6

In Figure 8-6 above,the one year since 1970 that the U.S.economy managed to travel along path E was

A)1971.
B)1970.
C)1979.
D)1986.

Question 21

When the actual inflation rate is equal to the expected inflation rate the economy will be ________ and the SP curve will ________.

A)in long-run equilibrium;shift upward
B)in disequilibrium,at an output level less than the natural rate of output;shift upward
C)in short-run equilibrium;shift upward
D)in short- and long-run equilibrium;be stable

Question 22

In ________ there were beneficial supply shocks to the U.S.economy.

A)1974-1975
B)1980-1981
C)1995-1999
D)All of the above

Question 23

A positive relationship between inflation and unemployment emerged in

A)1963-70.
B)1974-75.
C)1986-90.
D)All of the above

Question 24

The short-run SAS curve is positively sloped because as

A)AD increases,mark-ups are increased,indicating variable mark-up pricing.
B)SAS increases,mark-ups are increased,indicating variable mark-up pricing.
C)AD increases,raw materials prices set by auction tend to rise.
D)A and C are both correct.

Question 25

Suppose that the government enforced a law which required employers to adjust nominal wages monthly by the previous month's CPI.The short-run SAS curve would shift ________ and the SP curve would be ________.

A)gradually;stable
B)rapidly;unstable
C)continuously;flat
D)slowly;steep

Question 26

Each SP curve is drawn assuming

A)Pe as embodied in wage contracts is "fixed."
B)Pe and prices are rigid.
C)Pe and real wages are rigid.
D)None of the above.

Question 27

Which of the following will shift the short-run Phillips Curve?

A)supply shocks
B)price controls
C)removal of price controls
D)All of the above are correct.

Question 28

The natural unemployment rate fell in the 1990s in part because of ________.

A)a drop in the fraction of labor force made up of teenagers
B)an increase in the fraction of the male labor force in prison
C)the growth in temporary help agencies
D)All of the above

Question 29

The European Monetary System

A)broke down in 1990 and resulted in a resurgence of inflation in many European countries.
B)was still in place in 1996 but was permitting frequent exchange rate adjustments.
C)came to an end in 1992 and was followed by devaluations in Italy,the U.K.and several other countries.
D)has been a successful experiment in fixed exchange rates and was still in place as of 1996.

Question 30

When the expected rate of inflation falls,the short-run Phillips Curve

A)shifts upward.
B)shifts downward.
C)remains unaffected.
D)becomes vertical.

Question 31

In ________ there were adverse supply shocks to the U.S.economy.

A)1973-1981
B)1981-1986
C)1995-1999
D)All of the above

Question 32

Compared to an economy with staggered overlapping wage contracts,an economy in which wage contracts are renegotiated simultaneously will tend to have

A)steeper SP curves.
B)flatter SP curves.
C)faster shifting of its SP curves.
D)slower shifting of its SP curves.

Question 33

Figure 8-1

Everywhere to the left of the long-run Phillips Curve as in Figure 8-1 above

A)actual inflation is less than expected inflation and the expected inflation rate will be reduced.
B)actual inflation is less than expected inflation and the expected inflation rate will be raised.
C)actual inflation is greater than expected inflation and the expected inflation rate will be raised.
D)actual inflation is greater than expected inflation and the expected inflation rate will be reduced.

Question 34

For countries with high inflation rates,joining the European Monetary System meant

A)higher unemployment until they could lower their inflation rates sufficiently.
B)facing periodic upward adjustments in their exchange rate with the deutsche mark.
C)having to pursue loose monetary policy until they lowered the unemployment rate to the European average.
D)abandoning the fixed exchange rates they had preserved since the 1960s.

Question 35

In constructing the short-run Phillips Curve,SP,

A)real wages are fixed.
B)nominal wages are renegotiated.
C)nominal wages are fixed.
D)raw materials prices are fixed.

Question 36

The introduction of a single currency or "Euro" in 1999 ________ the likelihood that inflation rates will converge in countries that join the Euro.

A)increases
B)decreases
C)has no effect on
D)may increase or decrease

Question 37

The flatter the SP curve

A)the greater will be the shift in the SP.
B)the greater will be the change in inflation and the smaller will be the change in real GDP for any given change in nominal GDP growth.
C)the greater will be the change in real GDP and the smaller will be the change in inflation for any given change in nominal GDP growth.
D)the greater will be the growth of nominal GDP.

Question 38

A policy to slow the growth of nominal GDP

A)can result in a higher inflation rate and an increase in the output ratio.
B)can result in a lower inflation rate and a drop in the output ratio.
C)can be combined with cost-cutting supply policies to lower the inflation rate while maintaining the output ratio.
D)A and C.
E)B and C.

Question 39

The slope of the SP curve is determined in large part by the

A)rate of increase in mark-ups.
B)the slope of the LP curve.
C)the level of Pe.
D)the level of fixed real wage.

Question 40

A negative relationship between inflation and unemployment emerged in

A)1963-70.
B)1974-75.
C)1979-81.
D)All of the above

Question 41

Figure 8-5

In Figure 8-5 above,from point B suppose the nominal wage rises by 5 percent while aggregate demand remains constant.As a result we

A)move to point C.
B)move to point D.
C)move to point F.
D)move to point A.
E)remain at point B.

Question 42

Figure 8-5

In Figure 8-5 above,in going from points A to B the real wage ________,and then from point B to point C (where the exact price level is 1.1025,rounded to 1.10 in the diagram)the real wage ________.

A)rose,remained constant
B)rose,rose again
C)fell,remained constant
D)fell,fell again
E)remained constant,remained constant

Question 43

If there is a permanent adverse supply shock,

A)the rate of inflation can be held constant if real wages are kept from falling.
B)an extinguishing policy will produce an acceleration of inflation.
C)the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is vertical.
D)the natural level of real GDP will remain the same if the supply curve of labor is vertical.

Question 44

Figure 8-5

In Figure 8-5 above,from initial point A in the top diagram AD₀ shifts to AD₁,while the nominal wage remains constant.Short-run equilibrium occurs at point

A)G.
B)B.
C)C.
D)D.
E)F.

Question 45

Stagflation may be explained by

A)an upward shift in the SP curve.
B)a downward shift in the SP curve.
C)a stagnating level of AD.
D)a stagnating level of SAS.

Question 46

Figure 8-5

In Figure 8-5 above,the wage rate attached to SAS₁ is

A)1.10.
B)between 1.05 and 1.10.
C)1.05.
D)1.00.

Question 47

Everywhere to the right of the long-run Phillips Curve

A)actual inflation is less than expected inflation and the expected inflation rate will be reduced.
B)actual inflation is less than expected inflation and the expected inflation rate will be raised.
C)actual inflation is greater than expected inflation and the expected inflation rate will be raised.
D)actual inflation is greater than expected inflation and the expected inflation rate will be reduced.

Question 48

Figure 8-2

In Figure 8-2 above,a policy that maintains the level of real GDP in the advent of an adverse supply shock is a(n)

A)extinguishing policy;M.
B)neutral policy;L.
C)price-control policy;N.
D)accommodating policy;N.

Question 49

Suppose that an adverse supply shock causes downward pressure on nominal wages and unemployment to increase.If the Fed increases the money supply to stimulate AD and restore output to its previous level (assuming no change in the labor supply)a(n)

A)one time increase in prices will result.
B)inflationary spiral will begin if the real GDP has been reduced.
C)increase in the real GDP will follow.
D)All of the above

Question 50

Figure 8-5

In Figure 8-5 above,a crucial assumption that goes into positioning the SP curve in the bottom diagram is that

A)the wage rate is 1.00.
B)expected inflation is zero.
C)expected inflation is 5 percent.
D)the AD curve is AD₁.
E)the shift of AD₁ to AD₂ will be repeated continuously.

Question 51

Along the SP curve with expected inflation of 4 percent,we are below the natural GDP when

A)inflation falls below 4 percent.
B)inflation rises above 4 percent.
C)expected inflation falls below 4 percent.
D)expected inflation rises above 4 percent.

Question 52

Figure 8-5

In Figure 8-5 above,if we move from points A to B to C in the top diagram,this is translated to the bottom diagram as a move from points

A)A to J and back to A.
B)A to J.
C)A to H.
D)A to J to H.
E)A to H and back to A.

Question 53

The success or failure of economic policy with regard to the twin goals may be measured by the

A)stagflation rate.
B)unemployment rate.
C)change in the output ratio.
D)inflation rate.

Question 54

Figure 8-1

In Figure 8-1 above,suppose that the economy traces the path E₀ to E₁ to E₁'.We might conclude that ________ fiscal or monetary policy shifted the AD curve with price expectation first ________ then ________.

A)expansionary;constant;revised upward
B)expansionary;revised upward;constant
C)contractionary;revised upward;constant
D)contractionary;constant;revised downward

Question 55

Suppose than successive AD/SAS equilibrium points run up a vertical line to the right of the LAS curve.It must be the case that inflation is ________ the average expected inflation figured into the wage contracts in force,which allows output to ________ the natural GDP.

A)greater than,remain below
B)greater than,remain above
C)less than,remain below
D)less than,remain above
E)equal to,be maintained at

Question 56

When the expected inflation rate is 5 percent,we know to draw the short-run Phillips Curve through the

A)horizontal axis at Y = 105.
B)horizontal axis at P = 1.05.
C)long-run Phillips Curve at P = 1.05.
D)long-run Phillips Curve at p = 5.

Question 57

At every current AD/SAS equilibrium point to the left of the LAS curve,the price level is ________ than that expected on average and figured into the wage contracts in force,and thus there is pressure on the SAS curve to shift ________ with wage renegotiations.

A)greater,upward
B)greater,downward
C)less,upward
D)less,downward

Question 58

Figure 8-5

In Figure 8-5 above,from initial point A in the top diagram AD₀ shifts to AD₁,while at the same time the nominal wage rises by 5 percent.Short-run equilibrium occurs at point

A)G.
B)B.
C)C.
D)D.
E)F.

Question 59

In response to a rapid deceleration in the growth rate of nominal GDP in the early 1980s,

A)inflation declined slowly,thus giving empirical support to the proponents of the adaptive expectations approach.
B)inflation declined slower than the deceleration in nominal GDP and real output actually declined.
C)inflation declined slower than the deceleration in nominal GDP and the output ratio actually declined.
D)All of the above are correct.

Question 60

At every current AD/SAS equilibrium point to the right of the LAS curve,the price level is ________ than that expected on average and figured into the wage contracts in force,and thus there is pressure on the SAS curve to shift ________ with wage renegotiations.

A)greater,upward
B)greater,downward
C)less,upward
D)less,downward

Question 61

As the output ratio falls below 100%,unemployment

A)falls and inflation rises.
B)rises and inflation falls.
C)and inflation rise.
D)and inflation fall.

Question 62

At any point on the current SP curve that is to the right of the LP line,actual inflation is ________ than expected,which leads to wage renegotiations that shift SP ________.

A)lower,upward
B)lower,downward
C)higher,upward
D)higher,downward

Question 63

The "long-run Phillips Curve" is the set of points for which

A)expected inflation is zero.
B)expected inflation is equal to actual inflation.
C)actual inflation is zero.
D)actual inflation is equal to expected inflation plus the growth rate of nominal wages.
E)actual inflation is equal to expected inflation minus the growth rate of nominal wages.

Question 64

Figure 8-6

In Figure 8-6 above,an adverse supply shock accompanied by a neutral policy take us along path

A)F.
B)G.
C)H.
D)A.

Question 65

Figure 8-6

In Figure 8-6 above,a beneficial supply shock accompanied by an accommodating policy takes us along path

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

Question 66

The SP curve shifts downward when

A)the average wage rate falls.
B)the average wage rate rises.
C)expected inflation falls.
D)expected inflation rises.

Question 67

If the inflation rate is 10% and nominal GDP growth is 8% then real GDP must have

A)increased by 2%.
B)decreased by 18%.
C)decreased by 2%.
D)increased by 18%.

Question 68

The short-run equilibrium of inflation and real GDP

A)depends only on the rate of growth of the money supply.
B)occurs where expected inflation equals actual inflation.
C)depends only on the rate of growth of nominal GDP.
D)None of these.

Question 69

The economy is in long-run equilibrium

A)at any point along the current SP curve.
B)where the current SP curve intersects the LP line.
C)at any point along the SP curve for zero expected inflation.
D)only where the SP curve for zero expected inflation intersects the LP line.

Question 70

If nominal GDP growth has accelerated permanently (assuming Y(N),is constant),

A)real GDP must keep growing until the growth rate of nominal GDP equals the inflation rate.
B)real GDP will increase by the same percentage that nominal GDP increased.
C)real GDP must keep growing until the rate of growth of real GDP equals the inflation rate.
D)the level of real GDP will be permanently increased.

Question 71

The growth of nominal GDP

A)can be broken down into the growth of the price level times the growth of real GDP.
B)is equal to the index of prices times the level of real GDP.
C)can be broken down into the growth of money supply plus the growth of velocity.
D)is the same as the growth of aggregate supply.

Question 72

Along the SP curve with expected inflation of 6 percent,we are above the natural GDP when

A)inflation falls below 6 percent.
B)inflation rises above 6 percent.
C)expected inflation falls below 6 percent.
D)expected inflation rises above 6 percent.

Question 73

A rise in expected inflation causes

A)the SP curve to shift upward.
B)the SP curve to shift downward.
C)a movement upward along the SP curve.
D)a movement downward along the SP curve.

Question 74

Figure 8-6

In Figure 8-6 above,positive nominal GDP growth accompanied by higher inflationary expectations take us along path

A)A.
B)C.
C)E.
D)G.

Question 75

The slope of the SP curve depends on

A)how business changes its markups when output varies.
B)whether the expansionary force in the economy is coming through monetary policy or fiscal policy.
C)the percentage of GDP that is sold on auction markets.
D)both A and C.

Question 76

As the output rises above 100%,unemployment

A)falls and inflation rises.
B)rises and inflation falls.
C)and inflation rise.
D)and inflation fall.

Question 77

Which of the following does NOT affect nominal GDP?

A)tax rate
B)foreign exchange rate
C)nominal money supply
D)expected inflation rate

Question 78

If x is the growth rate of nominal GDP,p is the inflation rate,and y is the growth rate of real output,then

A)y = x + p.
B)p = x + y.
C)x = p + y.
D)none of the above.

Question 79

All points on the SP curve (but not on the LP line)share the characteristic that the economy is not in the long-run equilibrium because

A)price level is constantly increasing faster than nominal wage rate.
B)wage contracts failed to anticipate inflation correctly.
C)wage contracts failed to specify in advance the wage increases necessary to keep up with inflation.
D)All of the above.

Question 80

An increase in the rate of growth of nominal GNP

A)will cause a greater increase in real GNP the lower the rate of inflation.
B)will cause a smaller increase in real GNP the lower the rate of inflation.
C)will shift the SP curve upward.
D)will shift the SP curve downward.