Question 1

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 was first proposed by A. W. H. Phillips in 1958. John Maynard Keynes, Joseph Schumpeter, and Milton Friedman have also made significant contributions to economic theory, but they did not specifically develop the Phillips Curve.

Question 2

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 GDP, there will be a less than 1% increase in the unemployment rate. This is because employers often adjust the working hours of their current employees rather than immediately laying them off, as well as implementing other cost-saving measures before resorting to layoffs. Therefore, choice B is the best answer as it correctly identifies one of the reasons for the less than 1:1 ratio in Okun's law. The other options may be relevant to understanding the labor market, but they do not directly relate to Okun's law.

Question 3

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

According to Okun's law, a 1% decrease in unemployment is usually associated with a 2% increase in real GDP. Therefore, if the unemployment rate fell by a full percentage point, it would most likely be attributable to a 2% increase in real GDP.

Question 4

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

Accepted Answer

According to Okun's law, for every 1% increase in a positive output gap, the unemployment rate decreases by 0.5%. Therefore, the correct choice is B, which states that an increase in a positive output gap decreases the unemployment rate by 0.5%. None of the other choices correctly state the relationship between an increase in a positive output gap and the unemployment rate.

Question 5

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 6

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

Accepted Answer

When there is a supply shock caused by an increase in the price of gasoline, it leads to an increase in the cost of production for many firms that depend on gasoline to produce their goods. This leads to a decrease in output (as firms produce less due to higher costs) and an increase in prices (as firms pass on the higher costs to consumers). Therefore, the correct choice is B.

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 shows the inverse relationship between the unemployment rate and the rate of change in the aggregate price level. As inflation increases, firms need to hire more workers, reducing unemployment. Conversely, increasing unemployment leads to lower inflation. Thus, the correct answer is D - the aggregate price level.

Question 8

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

Accepted Answer

The relationship between the output gap and cyclical unemployment is expressed by Okun's law, which states that for every 1% increase in the output gap, there will be a corresponding 0.5% increase in cyclical unemployment.

Question 9

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

Accepted Answer

The statement describes Okun's law, which states that for every 1% increase in the output gap (the difference between actual and potential GDP), the unemployment rate will decrease by 0.5%. This relationship was first proposed by economist Arthur Okun in the 1960s. Choice B, Phillips's law, refers to the inverse relationship between unemployment and inflation, while choices C and D do not relate to this concept.

Question 10

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 11

The short-run Phillips curve shows:

Accepted Answer

The short-run Phillips curve shows an inverse relationship between unemployment and inflation. This means that as unemployment decreases, inflation increases and vice versa.

Question 12

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 economy operating above its potential, leading to increased demand for goods and services, which can cause inflation to increase.

Question 13

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 14

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 15

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 16

_____ depicts a trade-off between unemployment and inflation.

Accepted Answer

The Phillips curve shows the relationship between unemployment and inflation, depicting a trade-off between the two variables.

Question 17

A supply shock:

Accepted Answer

The answer of A supply shock:
...

Question 18

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, the economy is operating below its potential and demand for labor decreases, leading to an increase in unemployment rate.

Question 19

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

During a recession, many people may become discouraged and drop out of the labor force, meaning they are not actively seeking employment. When the economy starts to recover and job opportunities become available again, some of these discouraged workers may re-enter the labor force and start actively seeking employment. This increase in the supply of labor can temporarily raise the unemployment rate even as real GDP is expanding. Therefore, we can expect the unemployment rate to rise if people who were previously discouraged enter the work force but do not find jobs right away.

Question 20

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

Accepted Answer

If actual output growth and potential output growth are the same, there is no increase in the level of economic activity. Therefore, the economy is at its natural level of employment, and the unemployment rate will not change.

Quiz 28: Inflation, Disinflation, and Deflation