Question 1

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

Accepted Answer

This statement reflects the idea of the Phillips curve, which suggests that there is an inverse relationship between inflation and unemployment in the short run, but in the long run, unemployment returns to its natural rate. When aggregate demand increases, firms may initially increase production, leading to higher employment and lower unemployment. However, if people begin to expect higher inflation, firms may increase prices, leading to a decrease in real wages and a decline in employment that ultimately returns unemployment to its natural rate.

Question 2

When actual inflation exceeds expected inflation, unemployment exceeds the natural rate.

Accepted Answer

False

Question 3

An increase in expected inflation
A)shifts the short run Phillips curve downward and the unemployment inflation trade-off is less favourable.
B)shifts the short run Phillips curve upward and the unemployment inflation trade-off is more favourable.
C)shifts the short run Phillips curve downward and the unemployment inflation trade-off is more favourable.
D)shifts the short run Phillips curve upward and the unemployment inflation trade-off is less favourable.

Accepted Answer

An increase in expected inflation shifts the short run Phillips curve upward and the unemployment inflation trade-off is less favourable. This is because higher expected inflation leads to higher actual inflation which reduces the unemployment rate in the short run but only at the cost of higher inflation. Thus, the trade-off is less favourable as the same level of inflation requires a higher rate of unemployment.

Question 4

In the short run, an increase in aggregate demand increases prices and output, and decreases unemployment.

Accepted Answer

When aggregate demand increases, businesses will respond by increasing production and hiring more workers, which will lead to an increase in output and a decrease in unemployment. However, in the short run, businesses may not yet have the capacity to increase production sufficiently, which can lead to an increase in prices due to increased demand. Overall, the short-run effect is an increase in both prices and output, and a decrease in unemployment.

Question 5

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Accepted Answer

If people have rational expectations, they will anticipate the contraction and adjust their behavior accordingly, leading to a decrease in inflation without causing a significant increase in unemployment.

Question 6

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

Accepted Answer

The natural rate hypothesis suggests that unemployment will eventually return to a natural rate that is determined by structural factors in the economy, such as demographics and technology. This natural rate is not affected by changes in inflation, so the statement is true.

Question 7

For centuries economists have puzzled over the relationship between a nation's money supply and its economic prosperity.In 1752, __________ suggested that if the money supply is increased when an economy is below full employment, spending will increase, which in turn creates economic expansion.
A)Arthur Brown
B)Jan Tinbergen
C)Karl Marx
D)David Hume

Accepted Answer

David Hume was the economist who suggested that increasing the money supply when an economy is below full employment would lead to increased spending and economic expansion.

Question 8

One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that
A)firms will be put in a position of competing more intensely for scarce resources.
B)people will pay higher prices because competition among suppliers intensifies.
C)workers will focus more directly on protecting their jobs.
D)firms will refuse to shift higher labour costs along to consumers for fear of losing their markets.

Accepted Answer

When the unemployment rate declines, the number of available workers also declines. This means firms have to compete more intensely for the scarce resources, including labor. As a result, wages are bid up, marginal cost increases, and firms increase the prices of their goods and services to maintain profits, eventually leading to inflation.

Question 9

The original Phillips curve illustrates the
A)trade-off between inflation and unemployment.
B)trade-off between output and unemployment.
C)positive relationship between output and unemployment.
D)positive relationship between inflation and unemployment.

Accepted Answer

The original Phillips curve shows the inverse relationship between unemployment and inflation. As unemployment decreases, inflation increases and vice versa, indicating a trade-off between the two.

Question 10

-Refer to the Figure above.Suppose the government decreases tax rates dramatically in order to decrease the level of employment.We would expect to see aggregate demand shift to the
A)left and a move up the short run Phillips curve.
B)left and a move down the short run Phillips curve.
C)right and a move up the short run Phillips curve.
D)right and a move down the short run Phillips curve.

Accepted Answer

A decrease in tax rates increases disposable income, leading to higher consumption and investment, which shifts aggregate demand to the right. This typically results in higher inflation and lower unemployment, causing a move up the short-run Phillips curve.

Question 11

-Refer to the Figure above.Suppose that the government in the economy of this diagram regards 9 per cent unemployment as unacceptable.If the government insists on trying to reduce the unemployment rate from 9 per cent to 7 per cent, regardless of the consequences, then
A)pressure will build in the economy to continuously reduce the rate of inflation.
B)the long run Phillips curve becomes horizontal, freezing the rates of inflation and unemployment.
C)the inflation rate will increase but the unemployment rate will stay at 7 per cent.
D)in the long run the rate of unemployment remains unchanged, but inflation will probably accelerate.

Accepted Answer

In the long run, attempts to reduce unemployment below the natural rate can lead to accelerating inflation without reducing unemployment, as per the Phillips curve theory.

Question 12

A sudden monetary contraction moves the economy up a short run Phillips curve, reducing unemployment and increasing inflation.

Accepted Answer

A monetary contraction typically reduces aggregate demand and slows down economic growth, which would result in higher unemployment and lower inflation. This would shift the economy down the short run Phillips curve, not up.

Question 13

The Phillips curve illustrates the positive relationship between inflation and unemployment.

Accepted Answer

The answer of The Phillips curve illustrates the positive relationship...

Question 14

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and
A)decreases growth.
B)decreases unemployment.
C)increases unemployment.
D)decreases inflation.

Accepted Answer

The answer of The Phillips curve is an extension of...

Question 15

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.

Accepted Answer

An increase in price expectations means that workers and firms expect prices to rise, which leads to higher pressure for wages to increase. As a result, firms may increase prices to cover the higher labor costs, leading to higher inflation. This upward shift in the Phillips curve implies that a given level of unemployment is associated with a higher rate of inflation, reducing the trade-off between inflation and unemployment.

Question 16

According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment,
A)the economy will experience an increase in inflation.
B)the economy will experience a decrease in inflation.
C)inflation will be unaffected if price expectations are unchanging.
D)None of these answers.

Accepted Answer

The Phillips curve shows an inverse relationship between unemployment and inflation in the short run. Therefore, if policy makers pursue an expansionary policy to lower unemployment, it will result in an increase in inflation.

Question 17

When unemployment is below the natural rate the labour market is unusually tight, putting pressure on wages and prices to rise.

Accepted Answer

When unemployment is below the natural rate, it indicates a scarcity of available workers and employers may have to compete for employees by offering higher wages and benefits. As a result, wages tend to rise, leading to an increase in prices and inflation. This phenomenon is known as the Phillips curve.

Question 18

Along a short run Phillips curve, a higher rate of
A)growth in output is associated with a higher unemployment rate.
B)growth in output is associated with a lower unemployment rate.
C)inflation is associated with a higher unemployment rate.
D)inflation is associated with a lower unemployment rate.

Accepted Answer

The answer of Along a short run Phillips curve, a...

Question 19

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long run Phillips curve
A)has a slope that is determined by how fast people adjust their price expectations.
B)is negatively sloped.
C)is vertical.
D)is positively sloped.

Accepted Answer

If all prices and incomes adjust proportionately to an increase in the price level, the long run Phillips curve will be vertical, indicating that there is no trade-off between inflation and unemployment. This is because any increase in aggregate demand will simply be reflected in higher prices, but will not affect output or employment in the long run.

Question 20

In the long run, the unemployment rate is independent of inflation, and the Phillips curve is vertical at the natural rate of unemployment.

Accepted Answer

This is known as the natural rate hypothesis, which suggests that in the long run, there is no trade-off between unemployment and inflation. The Phillips curve may be downward sloping in the short run, but in the long run, it becomes vertical at the natural rate of unemployment.

Quiz 17: The Short Run Trade-Off Between Inflation and Unemployment

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

When actual inflation exceeds expected inflation, unemployment exceeds the natural rate.

An increase in expected inflation

In the short run, an increase in aggregate demand increases prices and output, and decreases unemployment.

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

For centuries economists have puzzled over the relationship between a nation's money supply and its economic prosperity.In 1752, __________ suggested that if the money supply is increased when an economy is below full employment, spending will increase, which in turn creates economic expansion.

One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that

The original Phillips curve illustrates the

-Refer to the Figure above.Suppose the government decreases tax rates dramatically in order to decrease the level of employment.We would expect to see aggregate demand shift to the

-Refer to the Figure above.Suppose that the government in the economy of this diagram regards 9 per cent unemployment as unacceptable.If the government insists on trying to reduce the unemployment rate from 9 per cent to 7 per cent, regardless of the consequences, then

A sudden monetary contraction moves the economy up a short run Phillips curve, reducing unemployment and increasing inflation.

The Phillips curve illustrates the positive relationship between inflation and unemployment.

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.

According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment,

When unemployment is below the natural rate the labour market is unusually tight, putting pressure on wages and prices to rise.

Along a short run Phillips curve, a higher rate of

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long run Phillips curve

In the long run, the unemployment rate is independent of inflation, and the Phillips curve is vertical at the natural rate of unemployment.