Question 1

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible
A)should not see an increase in the unemployment rate even in the short run.
B)will having rising unemployment for a while, but then return to the natural rate of unemployment.
C)will have a permanently higher unemployment rate.
D)None of the above is suggested by the arguments of Friedman and Phelps.

Accepted Answer

Both Friedman and Phelps argue that in the short-run, a disinflationary policy that is not credible will lead to higher unemployment as workers and firms adjust their expectations. However, they also argue that over time, the natural rate of unemployment will be restored as workers adjust their wage expectations and firms adjust their hiring practices. Therefore, option B is the most accurate reflection of their arguments.

Question 2

If inflation expectations rise, the short-run Phillips curve shifts
A)left. If inflation remains the same, unemployment falls.
B)left. If inflation remains the same, unemployment rises.
C)right. If inflation remains the same, unemployment falls.
D)right. If inflation remains the same, unemployment rises.

Accepted Answer

If inflation expectations rise, it means that workers and firms expect prices to increase in the future. As a result, workers will demand higher wages and firms will increase prices, leading to an increase in inflation in the short run. This means that the short-run Phillips curve shifts right, indicating that at any level of unemployment, there will be a higher level of inflation. Therefore, if inflation remains the same, unemployment rises.

Question 3

Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises
A)raise both inflation and the unemployment rate.
B)raise the inflation rate and reduce the unemployment rate.
C)reduce the inflation rate and raise the unemployment rate.
D)reduce both the inflation rate and the unemployment rate.

Accepted Answer

The housing and financial crises in 2008 led to a decrease in demand and economic activity, which resulted in many businesses and banks facing bankruptcy or losses. As a result, unemployment rose due to job losses and reduced demand for labor. Additionally, the decreased economic activity led to reduced demand for goods and services, which resulted in a decrease in inflation. Therefore, the short-run effects of the housing and financial crises were reduced inflation rates and raised unemployment rates.

Question 4

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
A)unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
B)unemployment falls, but it would have fallen more if people had been expecting 25% inflation.
C)unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
D)unemployment rises, but it would have risen more if people had been expecting 25% inflation.

Accepted Answer

The answer of Refer to Monetary Policy in Flosserland. Suppose...

Question 5

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then
A)unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
B)unemployment falls, but it would have fallen more if people had been expecting 22% inflation.
C)unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
D)unemployment rises, but it would have risen more if people had been expecting 22% inflation.

Accepted Answer

When inflation is reduced to only 12.5%, it would lead to a decrease in unemployment. However, if the public had expected a reduction to only 20%, they may have already factored in some level of inflation in their decision-making, and therefore the reduction to 25% would still lead to a decrease in unemployment, but not as much as it would have if their expectations had been set at 12.5%. Thus, unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.

Question 6

Other things the same, a country that decides to reduce inflation will
A)have a higher unemployment rate in the short run and the long run.
B)have a higher unemployment rate only in the long run.
C)have a higher unemployment rate only in the short run.
D)not have a higher unemployment rate in either the short run or the long run.

Accepted Answer

When a country decides to reduce inflation, it usually does so by implementing contractionary monetary policies such as increasing interest rates. This makes borrowing more expensive for businesses, which leads to a decrease in investment and lower aggregate demand. As a result, production and employment decrease in the short run. However, in the long run, the economy can adjust to the new inflation rate and employment levels can return to their natural rate. Therefore, while there may be a temporary increase in unemployment, it is unlikely to persist in the long run.

Question 7

Considering a plot of the inflation rate and the unemployment rate, one might conjecture that the short run Phillips curve was further to the right in the first part of the 2000's than it was in the last part of the 1990s and 2000.
A)If so, this might have been the result of a negative supply shock or an increase in expected inflation.
B)If so, this might been the result of a negative supply shock, or a decrease in expected inflation.
C)If so, this might have been the result of a positive supply shock, or an increase in expected inflation.
D)If so, this might have been the result of a positive supply shock, or a decrease in expected inflation.

Accepted Answer

The answer of Considering a plot of the inflation rate...

Question 8

Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by
A)moving to the right along the short-run Phillips curve.
B)moving to the left along the short-run Phillips curve.
C)shifting the short-run Phillips curve right.
D)shifting the short-run Phillips curve left.

Accepted Answer

Rising world commodity prices increase input costs for firms, leading to a decrease in aggregate supply in the short run. This shifts the short-run Phillips curve to the right, indicating a higher trade-off between inflation and unemployment.

Question 9

Refer to The Economy in 2008. The effects of the housing and financial crises could be shown by shifting
A)aggregate demand to the right.
B)aggregate demand to the left.
C)aggregate supply to the right.
D)aggregate supply to the left.

Accepted Answer

The housing and financial crises led to a decrease in confidence and wealth among consumers and businesses, resulting in a decrease in spending and investment. This shift in behavior would cause a leftward shift of the aggregate demand curve.

Question 10

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If Flosserlanders believe their government then which, if any, curve(s) shift left?
A)the short-run and the long-run Phillips curve
B)the short-run but not the long run Phillips curve
C)the long-run but not the short-run Phillips curve
D)neither the short-run nor the long-run Phillips curve

Accepted Answer

The answer of Refer to Monetary Policy in Flosserland. Suppose...

Question 11

Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by
A)moving to the right along the short-run Phillips curve.
B)moving to the left along the short-run Phillips curve.
C)shifting the short-run Phillips curve right.
D)shifting the short-run Phillips curve left.

Accepted Answer

The answer of Refer to The Economy in 2008. The...

Question 12

Refer to the Economy in 2008. In the short-run the housing and financial crises
A)raised both the price level and output.
B)raised the price level and reduced output.
C)reduced the price level and raised output.
D)reduced both the price level and output.

Accepted Answer

The answer of Refer to the Economy in 2008. In...

Question 13

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
A)unemployment falls, but it would have fallen less if people had been expecting 12.5% inflation.
B)unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
C)unemployment rises, but it would have risen less if people had been expecting 12.5% inflation.
D)unemployment rises, but it would have risen less if people had been expecting 25% inflation.

Accepted Answer

The answer of Refer to Monetary Policy in Flosserland. Suppose...

Question 14

If a central bank attempts to lower the inflation rate but the public doesn't believe the inflation rate will fall as far as the central bank says, then in the short run unemployment
A)rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
B)rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
C)falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
D)falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

Accepted Answer

The answer of If a central bank attempts to lower...

Question 15

Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.
A)both the Classical dichotomy and the long-run Phillips curve
B)the Classical dichotomy, but not the long run Phillips curve
C)the long-run Phillips curve, but not the Classical dichotomy
D)neither the long-run Phillips curve nor the Classical dichotomy

Accepted Answer

Neither the long-run Phillips curve nor the Classical dichotomy suggest that the unemployment rate in Flosserland would be above the natural rate if the inflation rate has been stable for a long time. The long-run Phillips curve shows that there is a natural rate of unemployment that is not affected by changes in inflation in the long run, while the Classical dichotomy implies that real variables, such as the unemployment rate, are determined independently of monetary factors. Thus, neither theory suggests a link between a stable inflation rate and a deviation of the unemployment rate from its natural rate.

Question 16

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment
A)rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
B)rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
C)falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
D)falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

Accepted Answer

The answer of Suppose a central bank takes actions that...

Question 17

Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting
A)aggregate demand to the right.
B)aggregate demand to the left.
C)aggregate supply to the right.
D)aggregate supply to the left.

Accepted Answer

The answer of Refer to the Economy in 2008. The...

Question 18

The monetary-policy framework called inflation targeting is used explicitly by
A)no major country.
B)most major countries except the United States and Japan.
C)the United States, but it is not used by other major countries.
D)most major countries, including the United States and Japan.

Accepted Answer

Inflation targeting framework is used by most major countries except the United States and Japan.

Question 19

Refer to The Economy in 2008. In the short run the increased prices of world commodities
A)raised both the price level and output.
B)raised the price level and reduced output.
C)reduced the price level and raised output.
D)reduced both the price level and output.

Accepted Answer

Increased prices of world commodities, such as oil, increased the cost of production for firms. This caused a decrease in aggregate supply, leading to a higher price level and reduced output in the short run.

Question 20

Refer to The Economy in 2008. Given the effects of the financial and housing crisis on the price level and output and the effects of increased world commodity prices on the price level and output, the aggregate demand and aggregate supply model tells us that
A)output rises and the price level falls.
B)output may rise, fall or stay the same and the price level rises.
C)output falls and the price level may rise, fall or stay the same.
D)None of the above is correct.

Accepted Answer

The financial and housing crisis led to a decrease in consumer and business spending, which caused a leftward shift in the aggregate demand curve. This shift led to a decrease in output and potentially an increase in the price level. On the other hand, increased world commodity prices would cause a rightward shift in the aggregate supply curve, potentially leading to an increase in output and an increase in the price level. Overall, the combined effects of these two factors result in a decrease in output and potentially an increase in the price level. Thus, the correct choice is C.

Quiz 35: The Short-Run Tradeoff Between Inflation and Unemployment

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

If inflation expectations rise, the short-run Phillips curve shifts

Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises

Other things the same, a country that decides to reduce inflation will

Considering a plot of the inflation rate and the unemployment rate, one might conjecture that the short run Phillips curve was further to the right in the first part of the 2000's than it was in the last part of the 1990s and 2000.

Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by

Refer to The Economy in 2008. The effects of the housing and financial crises could be shown by shifting

Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by

Refer to the Economy in 2008. In the short-run the housing and financial crises

If a central bank attempts to lower the inflation rate but the public doesn't believe the inflation rate will fall as far as the central bank says, then in the short run unemployment

Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment

Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting

The monetary-policy framework called inflation targeting is used explicitly by

Refer to The Economy in 2008. In the short run the increased prices of world commodities

Refer to The Economy in 2008. Given the effects of the financial and housing crisis on the price level and output and the effects of increased world commodity prices on the price level and output, the aggregate demand and aggregate supply model tells us that