Question 1

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

Accepted Answer

When inflation expectations rise, the short-run Phillips curve shifts right, indicating that at any given inflation rate, the level of output is lower than before. This reflects the trade-off between inflation and unemployment, suggesting that higher inflation expectations lead to higher actual inflation for the same level of output or unemployment.

Question 2

If the central bank increases the growth rate of the money supply and initially inflation expectations are unchanged, then in the short run

Accepted Answer

The answer of If the central bank increases the growth...

Question 3

Which of the following models imply that a decrease in the money supply reduces unemployment temporarily but not permanently?

Accepted Answer

The answer of Which of the following models imply that...

Question 4

For many years country A has had a lower unemployment rate than country B. According to the long-run Phillips curve which of the following could explain this? Country A has

Accepted Answer

According to the long-run Phillips curve, there is no trade-off between unemployment and inflation in the long run. Therefore, the difference in unemployment rates between country A and B cannot be explained by differences in monetary policy (choices A and B). The only explanation among the given choices is that country A has a lower minimum wage than country B (choice D). This could lead to lower unemployment as employers would be more willing to hire workers at a lower wage.

Question 5

If a central bank increases the money supply growth rate, then in the short run

Accepted Answer

The answer of If a central bank increases the money...

Question 6

For a given level of inflation expectations, if the central bank increases the money supply growth rate, then in the short run

Accepted Answer

In the short run, an increase in money supply growth rate leads to an increase in aggregate demand, leading to higher prices and output. This causes the economy to move up along the short-run Phillips curve.

Question 7

An event that directly affects firms' costs of production and thus the prices they charge is called

Accepted Answer

A supply shock directly affects firms' costs of production by increasing or decreasing the availability and price of inputs, such as labor or raw materials. This can lead to changes in the prices that firms charge for their goods and services. A Phillips contraction refers to a relationship between inflation and unemployment, an inflationary spiral is a self-reinforcing cycle of rising prices and inflation, and a demand shock affects firms' revenues and production levels, but not necessarily their costs of production.

Question 8

If inflation is less than expected, then the unemployment rate is

Accepted Answer

According to the short-run Phillips curve, there is an inverse relationship between inflation and unemployment. If inflation is lower than expected, then the short-run Phillips curve will shift leftward, indicating that the economy can have lower unemployment levels at any given rate of inflation. However, in the long run, prices and wages will adjust, and the natural rate of unemployment will remain unchanged. Therefore, in the long run, the short-run Phillips curve will shift rightward, indicating that any given rate of inflation will correspond to a higher level of unemployment. Hence, the unemployment rate is greater than the natural rate, and option B is the correct answer.

Question 9

The idea that the long-run Phillips curve is

Accepted Answer

The idea that the long-run Phillips curve is vertical stems from the analysis of Friedman and Phelps, who argued that in the long run, the economy would adjust to changes in the money supply or aggregate demand, such that any increase in inflation would be met with an equal increase in the expected inflation rate. As a result, the long-run Phillips curve would be vertical, with no trade-off between inflation and unemployment. This idea was influential in shaping macroeconomic policy in the 1980s and beyond.

Question 10

If unemployment is above its natural rate, what happens to move the economy to long-run equilibrium?

Accepted Answer

When unemployment is above its natural rate, there is downward pressure on wages and prices. This causes inflation expectations to fall. As a result, the short-run Phillips curve shifts to the right. This encourages firms to lower their price expectations, which in turn leads to lower wages and prices, and a decrease in the natural rate of unemployment. This process will continue until the economy reaches its long-run equilibrium where actual and expected inflation rates are equal, and the unemployment rate is at its natural rate.

Question 11

Prime Minister Emma Bigshot urges passage of a bill to reduce unemployment benefits from very generous levels in her country. She also urges her country's central bank to raise the rate at which the money supply is increasing. In the long run which, if either, of these policies will reduce the unemployment rate?

Accepted Answer

The answer of Prime Minister Emma Bigshot urges passage of...

Question 12

If the central bank raises the rate at which it increases the money supply, then in the short run unemployment is

Accepted Answer

The answer of If the central bank raises the rate...

Question 13

The long-run Phillips curve would shift to the left if

Accepted Answer

The long-run Phillips curve shows the relationship between the inflation rate and the natural rate of unemployment. It is vertical at the natural rate of unemployment, implying that there is no trade-off between inflation and unemployment in the long run. The long-run Phillips curve can shift to the left if there is an increase in productivity, improvements in technology, or increase in labor market flexibility. Therefore, option C is correct. Option A is wrong because an increase in the money supply growth rate would lead to a higher inflation rate, shifting the short-run Phillips curve to the right, but it would not affect the long-run Phillips curve. Option B is wrong because a higher money supply growth rate has no impact on labor market flexibility.

Question 14

If unemployment is below its natural rate, what happens to move the economy to long-run equilibrium?

Accepted Answer

When unemployment is below its natural rate, there is upward pressure on wages and prices, leading to an increase in inflation expectations. This, in turn, causes the short-run Phillips curve to shift to the right, as higher expected inflation requires higher actual inflation rates to maintain the lower unemployment level. The economy will eventually move back to long-run equilibrium as workers and firms adjust their expectations and wages and prices adjust accordingly.

Question 15

The long-run Phillips curve would shift to the right if

Accepted Answer

The answer of The long-run Phillips curve would shift to...

Question 16

Other things the same, in the long run a country that reduces the minimum wage from very high levels will have

Accepted Answer

Lowering the minimum wage can lead to lower costs for firms, allowing them to hire more workers, which can lead to lower unemployment. However, it is unlikely to have a significant effect on inflation, as the minimum wage generally only affects a small portion of overall wages and prices. Therefore, the country would likely have lower unemployment and the same level of inflation.

Question 17

The long-run Phillips curve would shift to the left if

Accepted Answer

The answer of The long-run Phillips curve would shift to...

Question 18

Which of the following is an example of an adverse supply shock?

Accepted Answer

A worldwide drought would lead to a decrease in the supply of agricultural products, causing an adverse supply shock. A decrease in the money supply, a tax cut, and decreased government spending may have economic impacts, but they are not examples of adverse supply shocks.

Question 19

If inflation is greater than expected, then the unemployment rate is

Accepted Answer

The answer of If inflation is greater than expected, then...

Question 20

If the central bank keeps the money supply growth rate constant, but people raise their inflation expectations by 1 percentage point, then the short-run Phillips curve shifts

Accepted Answer

When people raise their inflation expectations by 1 percentage point, it means they expect prices to rise faster than before. As a result, firms will raise prices to meet the higher expected inflation rate. This will lead to higher actual inflation and the short-run Phillips curve will shift to the right. According to the Phillips curve, a higher inflation rate is associated with a lower unemployment rate. Therefore, the rightward shift of the Phillips curve implies that the unemployment rate will rise.

Quiz 35: The Short-Run Trade-Off Between Inflation and Unemployment

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

If the central bank increases the growth rate of the money supply and initially inflation expectations are unchanged, then in the short run

Which of the following models imply that a decrease in the money supply reduces unemployment temporarily but not permanently?

For many years country A has had a lower unemployment rate than country B. According to the long-run Phillips curve which of the following could explain this? Country A has

If a central bank increases the money supply growth rate, then in the short run

For a given level of inflation expectations, if the central bank increases the money supply growth rate, then in the short run

An event that directly affects firms' costs of production and thus the prices they charge is called

If inflation is less than expected, then the unemployment rate is

The idea that the long-run Phillips curve is

If unemployment is above its natural rate, what happens to move the economy to long-run equilibrium?

If the central bank raises the rate at which it increases the money supply, then in the short run unemployment is

The long-run Phillips curve would shift to the left if

If unemployment is below its natural rate, what happens to move the economy to long-run equilibrium?

The long-run Phillips curve would shift to the right if

Other things the same, in the long run a country that reduces the minimum wage from very high levels will have

The long-run Phillips curve would shift to the left if

Which of the following is an example of an adverse supply shock?

If inflation is greater than expected, then the unemployment rate is

If the central bank keeps the money supply growth rate constant, but people raise their inflation expectations by 1 percentage point, then the short-run Phillips curve shifts