Question 1

Many economists accept the idea of a short-run tradeoff between the unemployment and inflation rates, but they do not think that there is such a tradeoff in the long run.

Accepted Answer

This is the concept of the Phillips curve, which suggests that in the short run, as unemployment decreases, inflation increases, and vice versa. However, in the long run, this relationship breaks down as people adjust their expectations and the economy reaches its natural rate of unemployment. Many economists believe that in the long run, there is no tradeoff between unemployment and inflation.

Question 2

An ongoing economic growth causes continuous leftward shifts of the aggregate supply which, by themselves, would tend to cause an ongoing deflation.

Accepted Answer

An ongoing economic growth actually causes a rightward shift of the aggregate supply, as more goods and services are being produced. This would tend to cause inflation rather than deflation.

Question 3

In the long run, cost-push inflation results in a simultaneous decrease in the price level and real output.

Accepted Answer

Cost-push inflation occurs when the cost of production increases, leading to a decrease in aggregate supply. This results in an increase in prices and a decrease in the quantity of output. Therefore, in the long run, cost-push inflation results in higher prices and lower real output.

Question 4

In the short run, demand-pull inflation will drive up the price level and increase real output; in the long run, only the price level will rise.

Accepted Answer

In the short run, demand-pull inflation increases both price levels and real output due to higher demand. In the long run, however, output returns to its natural level, and only prices remain elevated.

Question 5

A shift in the Phillips Curve to the left will improve the "inflation-unemployment" choices available to society.

Accepted Answer

A leftward shift in the Phillips Curve indicates that a given level of inflation can be achieved at a lower level of unemployment, meaning society has more favorable choices in terms of balancing inflation and unemployment.

Question 6

The long-run aggregate supply curve is vertical.

Accepted Answer

The long-run aggregate supply curve is vertical because in the long run, all input factors can be adjusted and there are no constraints on production. This means that the economy can produce at its potential GDP without causing inflation.

Question 7

When the economy is experiencing cost-push inflation, an increase in aggregate demand will likely result in less inflation.

Accepted Answer

Cost-push inflation occurs when prices increase due to an increase in the cost of production or a decrease in the supply of goods and services. In this scenario, an increase in aggregate demand may lead to even higher prices, rather than less inflation, as the supply of goods and services is already constrained.

Question 8

The long-run Phillips Curve is vertical at the natural rate of unemployment.

Accepted Answer

In the long run, the Phillips Curve is vertical at the natural rate of unemployment, which means that there is no trade-off between inflation and unemployment. This is because in the long run, the economy returns to its potential output level and there are no persistent effects on the unemployment rate from changes in inflation.

Question 9

The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment.

Accepted Answer

The Phillips Curve theory suggests that there is an inverse relationship between inflation and unemployment, meaning that as inflation increases, unemployment decreases and vice versa.

Question 10

Economists often recommend active monetary policy, and perhaps fiscal policy, to counteract the recessions.

Accepted Answer

Economists generally recommend active monetary policy, such as adjusting interest rates or increasing the money supply, to stimulate the economy during a recession. Additionally, some economists also recommend fiscal policy, such as government spending or tax cuts, to further boost economic activity.

Question 11

Demand-pull inflation and cost-push inflation are identical concepts because both entail rising nominal wages and rising prices.

Accepted Answer

Demand-pull inflation occurs when demand for goods and services exceeds the supply, leading to an increase in prices. Cost-push inflation occurs when there is an increase in production costs, such as wages or raw materials, leading to an increase in prices. While both types of inflation may result in rising prices, the underlying causes are different.

Question 12

More inflation is likely to result when the government enacts policies to maintain full employment when there is cost-push inflation.

Accepted Answer

When the government enacts policies to maintain full employment during cost-push inflation, there may be an increase in demand for labor which can lead to higher wages and increased production costs. This can exacerbate cost-push inflation and lead to even higher levels of inflation.

Question 13

If the government attempts to maintain full employment under conditions of cost-push inflation, deflation is likely to occur.

Accepted Answer

If the government tries to maintain full employment during cost-push inflation, it may lead to further inflation rather than deflation, as increased demand can exacerbate inflationary pressures.

Question 14

In the long-run firms respond to the lower profits by reducing their nominal wage increases.

Accepted Answer

In the long-run, firms can adjust their input prices, including wages, to respond to changes in their profitability. If profits decrease, firms may reduce their nominal wage increases in order to maintain profitability.

Question 15

The short-run aggregate supply curve shifts to the left when nominal wages rise in response to price level increases.

Accepted Answer

When nominal wages rise in response to price level increases, the short-run aggregate supply curve shifts to the left. This is because higher nominal wages increase firms' production costs, which leads to a decrease in output and a leftward shift of the SRAS curve.

Question 16

The characteristics of the long-run Phillips Curve suggest that the economy is generally stable at its natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve shows that there is no trade-off between inflation and unemployment in the long run. Instead, the natural rate of unemployment (the rate at which the economy is stable and not experiencing cyclical unemployment) is determined by structural factors such as demographics, technology, and institutions. Therefore, if the economy is operating at its natural rate of unemployment, it is generally stable in the long run.

Question 17

Based on the long-run Phillips Curve, any particular rate of inflation is compatible in the long run with the natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve suggests that there is no trade-off between inflation and unemployment in the long run, and that any particular rate of inflation is compatible with the natural rate of unemployment. Thus, the answer is true.

Question 18

An upward shift of the Phillips Curve is consistent with the occurrence of stagflation.

Accepted Answer

An upward shift of the Phillips Curve implies that a higher rate of inflation is associated with higher unemployment. This occurs during stagflation, where both inflation and unemployment increase at the same time.

Question 19

Most economists reject the idea of a long-run tradeoff between unemployment and inflation.

Accepted Answer

This idea was popularized during the 1960s and 1970s, but it has been widely discredited by empirical evidence and theoretical developments since then. The modern consensus among economists is that there may be a short-run tradeoff between unemployment and inflation, but this is temporary and eventually gives way to a long-run neutrality of money in the face of real economic forces.

Question 20

The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve is a vertical line at the natural rate of unemployment, indicating no trade-off between inflation and unemployment in the long run.

Quiz 16: B: Long-Run Macroeconomic Adjustments