Question 1

Which of the following was the primary cause of the large increase in oil prices in the 1970s?

Accepted Answer

The primary cause of the large increase in oil prices in the 1970s was a decrease in the supply of oil. This was due to a combination of factors, including political instability in the Middle East, particularly the Arab-Israeli conflict, which resulted in several oil-producing countries imposing an embargo on exports to countries that supported Israel. This led to a significant reduction in the supply of oil, causing prices to rise. Additionally, the increase in production costs and difficulties in exploration and extraction in other regions further contributed to the decrease in supply.

Question 2

How will a favourable supply shock shift short-run aggregate supply,and how will output change?

Accepted Answer

A favourable supply shock, such as a decrease in the cost of production or an increase in productivity, will shift the short-run aggregate supply curve to the right. This is because firms are able to produce more output at any given price level. As a result, output will increase.

Question 3

Which of the following would cause the price level to rise and output to fall in the short run?

Accepted Answer

An adverse supply shock could cause an increase in the price level due to decreased supply, and a fall in output due to increased costs for firms.

Question 4

What happened to expected inflation in Canada during the 1970s?

Accepted Answer

During the 1970s, Canada experienced a substantial rise in expected inflation. This was largely due to the oil crisis and increased government spending, which led to higher prices and inflation expectations.

Question 5

How will a favourable supply shock shift the short-run Phillips curve,and how does unemployment change?

Accepted Answer

A favourable supply shock, such as a decrease in oil prices or an increase in productivity, shifts the short-run Phillips curve to the left. This means that for any given level of inflation, the unemployment rate will be lower than before the shock. In other words, the economy can achieve lower levels of unemployment without generating as much inflation. Therefore, unemployment will fall.

Question 6

Suppose that weather around the world is especially good next year,so farmers have unusually good crops.What might we expect that this will do to the short-run and long-run Phillips curves?

Accepted Answer

The short-run Phillips curve may shift to the left due to lower inflation expectations from increased supply of agricultural products, reducing costs for food and possibly other goods. However, the long-run Phillips curve is not affected by short-term supply changes, as it is determined by factors like technology, labor market institutions, and policy, which are not influenced by temporary changes in weather or crop yields.

Question 7

If policymakers accommodate an adverse supply shock,what will happen to the unemployment rate and inflation?

Accepted Answer

Accommodating an adverse supply shock typically involves monetary or fiscal policies that stimulate demand. While these policies can help lower unemployment by boosting economic activity, they also tend to increase inflation by raising demand in the face of constrained supply.

Question 8

Suppose a war disrupts the supply of oil to the country.What would we expect to happen to the short-run aggregate-supply curve,the short-run Phillips curve,and the long-run Phillips curve?

Accepted Answer

A disruption in the supply of oil would increase production costs, leading to a decrease in the short-run aggregate supply (shift left). This would also cause the short-run Phillips curve to shift right, indicating a higher inflation rate for any given level of unemployment. However, the long-run Phillips curve would remain unaffected because it is vertical, reflecting the natural rate of unemployment, which is not influenced by short-term supply shocks.

Question 9

How will an adverse supply shock shift the short-run aggregate-supply curve,and what will be the effect on prices?

Accepted Answer

An adverse supply shock, such as a natural disaster that disrupts production or an increase in input costs, will shift the short-run aggregate-supply curve left. This is because there will be a decrease in the amount of goods and services that can be produced at every price level. As a result, prices will rise because there will be less supply of goods and services available to meet demand.

Question 10

If there is an adverse supply shock,which of the following will most likely happen?

Accepted Answer

An adverse supply shock will reduce the supply of goods and services in the economy, leading to an increase in their prices. As a result, the aggregate supply curve will shift to the left, indicating a decrease in the quantity of output that firms are willing and able to supply at each price level. This will lead to a decrease in real output and an increase in prices, which will cause the short-run Phillips curve to shift to the right. Hence, the correct answer is D: The aggregate supply curve will shift left, and the short-run Phillips curve will shift right.

Question 11

How will an adverse supply shock shift the short-run Phillips curve,and how will it change unemployment?

Accepted Answer

An adverse supply shock such as an increase in oil prices or a natural disaster that disrupts production will increase costs for firms, leading to a decrease in aggregate supply. This will shift the short-run Phillips curve to the right, meaning that for any given level of inflation, there will be a higher level of unemployment. This is because firms need to reduce output and lay off workers to adjust to the higher costs. Therefore, option A is the correct answer.

Question 12

How will an adverse supply shock shift the short-run Phillips curve,and how does inflation change?

Accepted Answer

An adverse supply shock, such as an increase in oil prices or a natural disaster disrupting production, will result in a decrease in aggregate supply. This will cause the short-run Phillips curve to shift to the right, meaning that unemployment and inflation will both increase. Higher production costs lead to higher prices for goods and services, causing inflation to rise.

Question 13

If there is a favourable supply shock,which of the following will most likely happen?

Accepted Answer

A favourable supply shock increases the level of output at every price level, which means that the aggregate supply curve will shift right. However, because the increase in output leads to lower unemployment and higher inflation in the short run, the short-run Phillips curve will shift left. Therefore, both curves shift, but in opposite directions.

Question 14

What will a favourable supply shock cause the price level and output to do?

Accepted Answer

A favourable supply shock refers to an unexpected increase in the supply of goods and services, which leads to a decrease in their prices. This, in turn, leads to an increase in demand and output, as consumers are able to buy more for less. Therefore, a favourable supply shock will cause the price level to fall and output to rise.

Question 15

How will a favourable supply shock shift the short-run Phillips curve and how does it change inflation?

Accepted Answer

A favourable supply shock, such as a decrease in the cost of production, will shift the short-run Phillips curve to the left, indicating a lower level of inflation for any given level of unemployment. This is because the decrease in production costs will increase the aggregate supply, causing a decrease in prices and thus a decrease in inflation. Hence, option D is the correct choice.

Question 16

Suppose that a small economy that depends mostly on agriculture experiences a year with exceptionally good conditions for growing crops.What would the good weather do to the short-run aggregate-supply curve and the short-run Phillips curve?

Accepted Answer

When there are good weather conditions for agriculture, the short-run aggregate-supply curve would shift to the right because more goods and services can be produced at every price level. At the same time, the short-run Phillips curve would shift to the left because there would be less pressure on wages and prices to increase due to the increased output. Therefore, both curves would shift in opposite directions, with the short-run aggregate-supply curve shifting to the right and the short-run Phillips curve shifting to the left.

Question 17

What will an adverse supply shock cause output and prices to do?

Accepted Answer

An adverse supply shock is a sudden decrease in the supply of a key input, such as oil or labor, which can cause a decrease in productivity and an increase in costs. This leads to a decrease in output and an increase in prices, making D the correct answer.

Question 18

What is the effect of an adverse supply shock?

Accepted Answer

The answer of What is the effect of an adverse...

Question 19

In 1980,what was the Canadian inflation rate and unemployment rate?

Accepted Answer

The answer of In 1980,what was the Canadian inflation rate...

Question 20

In 1980,how did the Canadian misery index compare to the average?

Accepted Answer

The Canadian misery index in 1980 was 12.5, while the average misery index for developed countries was 10.5. This means that the Canadian misery index was much higher than average.

Quiz 16: The Short-Run Tradeoff between Inflation and Unemployment