Question 1

Suppose the full-employment level of real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?
A) 7%
B) 4%
C) 1%
D) -1%

Accepted Answer

The answer of Suppose the full-employment level of real GDP...

Question 2

Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P)
Can be expressed as
A) %∆P = %∆M ÷ %∆Y
B) %∆P = %∆M + %∆Y
C) %∆P = %∆M $\times$ %∆Y
D) %∆P = %∆M - %∆Y

Accepted Answer

The answer of Using the equation of exchange, if velocity...

Question 3

In general, economists believe that the Phillips curve is
A) downward sloping with a steeper slope in the long run than in the short run.
B) downward sloping with a steeper slope in the short run than in the long run.
C) downward sloping in the short run but vertical in the long run.
D) could be horizontal in the short run but always vertical in the long run.

Accepted Answer

Economists generally believe that the Phillips curve is downward sloping in the short run, but becomes vertical in the long run as there is no relationship between inflation and unemployment in the long run. This means that changes in the unemployment rate will not have a significant impact on inflation in the long run, and the Phillips curve will become vertical. Therefore, option C is the correct choice.

Question 4

In the long run, sustained inflation is due to
A) a one-time increase in money growth.
B) a continuous increase in the money growth rate.
C) a continuous increase in aggregate demand.
D) the rising price of oil.

Accepted Answer

Sustained inflation is caused by a continuous increase in the money growth rate, as more money is chasing the same amount of goods and services, leading to higher prices. A one-time increase in money growth or the rising price of oil may cause short-term inflation, but they alone cannot sustain it in the long run. Similarly, a continuous increase in aggregate demand may lead to temporary inflation, but it can only be sustained if it is accompanied by a continuous increase in the money growth rate.

Question 5

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?
A) 6%
B) 3%
C) 1%
D) 0%

Accepted Answer

According to the equation of exchange, MV = PY where M is the money supply, V is velocity, P is the price level, and Y is real GDP. Assuming constant velocity, we can simplify the equation to M/P = Y. Since the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate, the value of Y will increase by 3% and the value of M/P will also increase by 3%. However, since the long-run inflation rate is defined as the rate at which the price level is increasing, and we are assuming constant velocity, the inflation rate will be equal to the growth rate of M minus the growth rate of Y, which is 0%. Therefore, the long-run inflation rate is 0%.

Question 6

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If %∆M = %∆ Y_P , then %∆P = %∆M. B) If %∆M > %∆ Y_P , then %∆P > 0. C) If %∆M > %∆ Y_P , then %∆P > %∆M. D) If %∆M = %∆ Y_P , then %∆P < 0.

Accepted Answer

According to the equation of exchange, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. If velocity is stable and the economy moves to its potential output in the long run, then %∆Y = 0. Therefore, %∆M = %∆(PY)/V. Solving for %∆P, we get %∆P = %∆M - %∆V. Since %∆V is assumed to be stable, we can infer that if %∆M > %∆Y, then %∆P > 0. This is because any increase in the money supply beyond the increase in real output will result in inflationary pressure. Therefore, choice B is the best choice.

Question 7

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If %∆M > %∆ Y_P , then %∆P > %∆M. B) If %∆M > %∆ Y_P , then %∆P > %∆ Y_P. C) If %∆M = %∆ Y_P , then %∆P = 0. D) If %∆M = %∆ Y_P , then %∆P < 0.

Accepted Answer

The answer of Which of the following predictions can be...

Question 8

In the long run, unemployment
I. will be at the natural rate of unemployment.
II. is made up of structural and frictional unemployment.
III. could be made up of structural, frictional, and cyclical unemployment.
A) I, II, and III
B) I and III only
C) I and II only
D) I only

Accepted Answer

In the long run, the economy will reach its natural rate of unemployment which includes both structural and frictional unemployment. However, there can also be cyclical unemployment due to fluctuations in the business cycle. Therefore, options I and II are correct, and option III includes all three types of unemployment.

Question 9

In the equation of exchange, if velocity is stable,
A) %∆V = 0.
B) %∆V = 1.
C) %∆V is a positive constant value > 0.
D) %∆V = infinity.

Accepted Answer

If velocity is stable, then there is no change in the percentage of velocity, which means %∆V = 0.

Question 10

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If the growth rate in Y_P exceeds the money growth rate, there will be inflation. B) If the money growth rate is less than the growth rate in Y_P, there will be deflation. C) If the money supply grows at the same rate as growth in Y_P, the price level will grow at a constant rate. D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P.

Accepted Answer

The answer of Which of the following predictions can be...

Question 11

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?
A) 7%
B) 4%
C) 1%
D) -1%

Accepted Answer

The equation of exchange is MV=PY. We can rearrange it as (P/Y)=(M/V). Given that velocity is constant, we can assume that V=1. Therefore, P/Y=M. The long-run inflation rate is (change in money supply / full-employment level of real GDP) = 4% - 3% = 1%. Thus, the answer is (C).

Question 12

Which of the following statements is true? Economists generally agree that
A) the rate of inflation in the long run is determined primarily by growth in government spending.
B) factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause sustained inflation.
C) the primary cause of inflation is increases in the money supply growth that exceed growth increases in aggregate demand.
D) the major causes of inflation are declining productivity coupled with excessive spending.

Accepted Answer

The answer of Which of the following statements is true?...

Question 13

Evidence suggests that all countries with very high
A) inflation rates also have very high money growth rates.
B) unemployment rates also have very high GDP growth rates.
C) GDP growth rates also have very high government budget deficits.
D) government budget deficits also have very high inflation rates.

Accepted Answer

The answer of Evidence suggests that all countries with very...

Question 14

In the long-run, only a change in the _______ is likely to affect the inflation rate associated
With a particular rate of growth in the money supply.
A) aggregate demand
B) short-run aggregate supply
C) rate of economic growth
D) expectations about the price level

Accepted Answer

The answer of In the long-run, only a change in...

Question 15

In the long run, monetary growth
A) can change the unemployment rate only at the cost of increased inflation.
B) can change the unemployment rate while holding the inflation rate constant.
C) can promote economic growth.
D) cannot affect the factors that determine the economy's unemployment rate.

Accepted Answer

The answer of In the long run, monetary growth
A) can...

Question 16

Which of the following determines the rate of inflation in the long run?
I. the rate of money growth
II. changes in expectations about the price level
III. the rate of economic growth
IV. changes in government spending
A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV

Accepted Answer

The rate of inflation in the long run is primarily determined by the rate of economic growth and the rate of money growth. Changes in expectations about the price level and changes in government spending can have short-term effects on inflation, but they do not have a significant long-term impact. Therefore, option B (I and III only) is the best choice.

Question 17

In the long run, unemployment will be at the natural rate. This implies that
A) there is a one-to-one relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.
B) there is no relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.
C) there is a positive relationship between unemployment and inflation and consequently, the long-run Phillips curve is upward-sloping.
D) there is a negative relationship between unemployment and inflation and consequently, the long-run Phillips curve is downward-sloping.

Accepted Answer

In the long run, unemployment will be at the natural rate regardless of the level of inflation. This suggests that the long-run Phillips curve is vertical and there is no relationship between unemployment and inflation. The natural rate of unemployment is determined by structural factors such as demographics, technology, and labor market institutions, and not by the level of inflation. Therefore, the best answer is B, there is no relationship between unemployment and inflation and the long-run Phillips curve is vertical.

Question 18

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If the money supply grows at a faster rate than growth in Y_P, there will be inflation. B) If the money supply grows at a slower rate than growth in Y_P, there will be a decrease in the inflation rate. C) If the money supply grows at the same rate as growth in Y_P, the price level will fall and there will be deflation. D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P,.

Accepted Answer

According to the equation of exchange, MV=PY, where M is money supply, V is velocity, P is price level, and Y is real GDP. Assuming velocity is stable and the economy moves to its potential output in the long run, the equation can be simplified to M = PY. Thus, if the money supply (M) grows at a faster rate than the growth in real GDP (Y), there will be an increase in the price level (P) and hence inflation.

Question 19

Using the equation of exchange, the rate of money growth can be expressed as
A) %∆M $\times$ %∆V = (%∆P $\times$ %∆Y) ÷ %∆V
B) %∆M = (%∆P + %∆Y) ÷ %∆V
C) %∆M = %∆P + %∆Y - %∆V
D) M $\times$ V = P $\times$ Y

Accepted Answer

The answer of Using the equation of exchange, the rate...

Question 20

Suppose that rising productivity increases potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?
A) It should keep money supply constant.
B) It should increase money supply by 4% per period.
C) It should increase money supply by 4% in the first period and thereafter, hold money supply constant.
D) It should decrease money supply by 4% each period.

Accepted Answer

The answer of Suppose that rising productivity increases potential output...

Quiz 16: Inflation and Unemployment

Suppose the full-employment level of real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?

Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P) Can be expressed as

In general, economists believe that the Phillips curve is

In the long run, sustained inflation is due to

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

In the long run, unemployment I. will be at the natural rate of unemployment. II. is made up of structural and frictional unemployment. III. could be made up of structural, frictional, and cyclical unemployment.

In the equation of exchange, if velocity is stable,

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

Which of the following statements is true? Economists generally agree that

Evidence suggests that all countries with very high

In the long-run, only a change in the _______ is likely to affect the inflation rate associated With a particular rate of growth in the money supply.

In the long run, monetary growth

Which of the following determines the rate of inflation in the long run? I. the rate of money growth II. changes in expectations about the price level III. the rate of economic growth IV. changes in government spending

In the long run, unemployment will be at the natural rate. This implies that

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Using the equation of exchange, the rate of money growth can be expressed as

Suppose that rising productivity increases potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?