Question 1

According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls.

Accepted Answer

The short-run Phillips curve suggests that when actual real GDP is above potential output, the economy is overheating, leading to increased price levels (inflation) and a decrease in unemployment as demand for labor rises.

Question 2

Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?

Accepted Answer

An increase in the number of discouraged workers can lead to a fall in the unemployment rate during economic contraction because discouraged workers are not counted as part of the labor force. If more people stop looking for work due to discouragement, the labor force shrinks, and the unemployment rate can decrease even if the economy is not adding jobs.

Question 3

If an economy has just had a serious recession but real GDP is expanding once again, we can expect the unemployment rate to:

Accepted Answer

When the economy experiences a serious recession and real GDP starts expanding again, it takes some time for the jobs to start coming back. As a result, people who were previously discouraged and had left the labor force might re-enter looking for employment opportunities. Since the economy is still recovering and the job market is still in its way to recovery, it is hard for these people to find a job right away. This causes the unemployment rate to rise temporarily.

Question 4

Okun's law is less than a 1:1 ratio because some:

Accepted Answer

Okun's law states that for every 1% decrease in the economy's output, there will be a less than 1% increase in the unemployment rate. This is because employers are likely to change the working hours of current employees as the demand for goods or services changes, rather than immediately laying off workers. Therefore, option B is the correct choice. Option A could be a factor in causing fluctuations in the employment rate but does not explain the overall pattern of Okun's law. Option C is a possible solution for reducing unemployment, but it does not explain why Okun's law exists nor why the ratio is less than 1:1. Option D refers to the measurement of the employment rate and not really related to the cause of Okun's law.

Question 5

According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 4%, and the expected rate of inflation is 5%, then the unemployment rate is:

Accepted Answer

The answer of According to current estimates of Okun's law,...

Question 6

The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of:

Accepted Answer

Okun's law states that for every 1% increase in the output gap (the difference between actual and potential output), there will be a 0.5% decrease in the unemployment rate. Since the output gap is currently at -5% (100% - 95%), the predicted increase in the unemployment rate would be 2.5%. Adding this to the natural rate of unemployment (4%) gives us a predicted unemployment rate of 6.5%. Therefore, the correct answer is choice C.

Question 7

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in:

Accepted Answer

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in the aggregate price level. As unemployment decreases, the demand for labor increases, leading to higher wages and higher production costs, which can cause prices to rise. Thus, there is a trade-off between inflation and unemployment in the short-run, as shown by the downward sloping Phillips curve.

Question 8

Which of the following happen(s) when real GDP grows more slowly than potential GDP?

Accepted Answer

When real GDP grows more slowly than potential GDP, there is a negative output gap, indicating that the economy is not producing at its full potential. This leads to a decrease in demand for labor, and the unemployment rate rises. Therefore, the correct answer is D.

Question 9

The relationship between the output gap and cyclical unemployment is expressed by:

Accepted Answer

Okun's law states that for every 1 percent increase in the output gap, there will be a 2 percent decrease in cyclical unemployment.

Question 10

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

Accepted Answer

If actual output growth matches potential output growth, then there is neither a positive nor negative output gap, which means that the economy is operating at full employment. Therefore, the unemployment rate would stay the same.

Question 11

According to recent estimates of Okun's law, if the unemployment rate FELL by a full percentage point, it would most probably be attributable to a _____ in real GDP.

Accepted Answer

Okun's law states that for every 1% decrease in the unemployment rate, there is an associated increase in real GDP of approximately 2%. Therefore, for the reverse scenario of a 1% decrease in the unemployment rate, it would correspond to a 2% increase in real GDP. Therefore, the correct answer is B) 2% increase.

Question 12

_____ depicts a trade-off between unemployment and inflation.

Accepted Answer

The Phillips curve depicts a trade-off between unemployment and inflation, suggesting that as unemployment decreases, inflation will increase and vice versa. Keynes's law relates to the overall demand in the economy, the multiplier refers to the increase in aggregate demand resulting from an increase in government spending, and the Friedman curve is not a recognized economic concept.

Question 13

The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as _____ law.

Accepted Answer

This relationship between the output gap and unemployment rate is known as Okun's law. It was named after economist Arthur Okun, who first proposed the idea in the 1960s. The law states that for every 1% increase in the output gap (the difference between actual and potential GDP), there will be a corresponding 0.5% decrease in the unemployment rate. However, this relationship is not exact and can vary depending on various factors such as the type of economy, labor market conditions, and government policies.

Question 14

Okun's law suggests that a _____ increase in a positive output gap _____ the unemployment rate by _____.

Accepted Answer

According to Okun's law, a 1% decrease in the output gap should lead to a 0.5% decrease in the unemployment rate. Therefore, a positive output gap (when actual output is greater than potential output) would suggest that the unemployment rate is below its natural or equilibrium rate. A decrease in the output gap (which could be caused by an increase in demand or productivity) would, therefore, lead to a decrease in unemployment. So, the correct option is B, which suggests that a decrease in the positive output gap (i.e., a decrease in the difference between actual and potential output) would lead to a decrease in the unemployment rate, and vice versa.

Question 15

If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:

Accepted Answer

When the actual unemployment rate is below the natural rate, it indicates an overheating economy, and firms may need to raise wages to attract workers. This increase in labor costs can lead to higher prices, which causes inflation to increase.

Question 16

In 1958, _____ came up with a theory regarding the trade-off between unemployment and inflation.

Accepted Answer

The theory regarding the trade-off between unemployment and inflation is known as the Phillips Curve and it was developed by A.W.H. Phillips in 1958. John Maynard Keynes is famous for his macroeconomic theories and policies, Joseph Schumpeter is known for his work on entrepreneurship and innovation, and Milton Friedman is known for his work in monetarism and free market economics, but none of them are directly associated with the Phillips Curve.

Question 17

The short-run Phillips curve shows:

Accepted Answer

The short-run Phillips curve shows an inverse relationship between unemployment and inflation, meaning that as unemployment decreases, inflation increases and vice versa. This relationship is a key concept in macroeconomics and helps to explain the trade-off between inflation and unemployment in the short run.

Question 18

The unemployment rate will fall if potential output growth is:

Accepted Answer

When potential output growth is lower than actual output growth, it means the economy is growing faster than its long-term sustainable rate, leading to increased demand for labor and thus a decrease in the unemployment rate.

Question 19

A supply shock:

Accepted Answer

The answer of A supply shock:
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Question 20

A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.

Accepted Answer

A supply shock caused by an increase in the price of gasoline would increase the cost of production for many firms, leading to a decrease in output. As firms cut back on production, the decrease in supply would lead to an increase in prices. Therefore, output would decrease (choice B), while prices would increase (choice B).

Quiz 16: Inflation, Disinflation, and Deflation

According to the short-run Phillips curve, when actual real GDP is _ potential output, the price level _ and the unemployment rate falls.