Question 1

If the equation for a country's Phillips curve is  $\pi$ = 0.02 - 0.8(u - 0.05), where  $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

Accepted Answer

Substitute 0.04 for u in the equation: 
F1F1F1S1F1F1F10 = 0.02 - 0.8(0.04 - 0.05) 
F1F1F1S1F1F1F10 = 0.02 + 0.08 = 0.10 
Therefore, the inflation rate is 10 percent or 0.10. Since 0.10 is greater than 0.02, the answer is A, above 2 percent.

Question 2

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

Accepted Answer

According to the short-run Phillips curve, there is an inverse trade-off between unemployment and inflation in the short run, which means that policymakers who want to reduce unemployment need to increase aggregate demand. However, increasing aggregate demand can lead to higher inflation in the short run. Therefore, the best choice is to increase aggregate demand at a cost of generating higher inflation, which is option A.

Question 3

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.

Accepted Answer

When adaptive expectations are used, the natural rate of unemployment in the Phillips curve is referred to as the nonaccelerating inflation rate of unemployment (NAIRU), which represents the rate of unemployment at which the economy exhibits stable or constant inflation expectations.

Question 4

Cost-push inflation is the result of:

Accepted Answer

Cost-push inflation occurs due to adverse supply shocks, such as an increase in the cost of inputs or a decrease in the availability of resources. This leads to an increase in the cost of production for firms, which then results in higher prices for consumers.

Question 5

Inflation inertia refers to the idea that inflation:

Accepted Answer

Inflation inertia suggests that inflation will continue unless there is some force, such as government policy, that acts to stop it.

Question 6

In the case of cost-push inflation, other things being equal:

Accepted Answer

Cost-push inflation is caused by an increase in production costs, such as wages, rents, or raw materials. This results in decreased supply and higher prices. Therefore, the inflation rate will rise as a result of cost-push inflation. However, the increase in production costs may lead to a decrease in profit margins for companies, forcing them to reduce their workforce or cut back on production, which results in increased unemployment rates. Therefore, the unemployment rate may fall but the inflation rate will rise in case of cost-push inflation.

Question 7

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

Accepted Answer

This is known as the long-run Phillips curve, which shows that in the long run, there is no tradeoff between inflation and unemployment as people adjust their expectations of inflation to match the actual rate of inflation. Therefore, expected inflation will equal the actual inflation rate, creating a vertical Phillips curve where unemployment is determined by non-monetary factors such as demographics and technology.

Question 8

Demand-pull inflation is the result of:

Accepted Answer

Demand-pull inflation occurs when there is a high level of aggregate demand in the economy. This can be caused by factors such as low interest rates, high levels of government spending, or an increase in consumer confidence. As demand for goods and services increases, prices rise due to the scarcity of these goods and services.

Question 9

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

Accepted Answer

Adaptive expectations theory assumes that people base their expectations of inflation on recently observed inflation.

Question 10

The short-run Phillips curve:

Accepted Answer

According to the short-run Phillips curve, there is an inverse relationship between unemployment and inflation. If expected inflation increases, workers and firms will adjust their wage and price setting behavior accordingly, which will increase actual inflation. As a result, the short-run Phillips curve will shift upward to reflect the new relationship between unemployment and inflation.

Question 11

In the 1960s, in the United States:

Accepted Answer

The 1960s in the United States were characterized by a period of economic expansion with a relatively low unemployment rate. However, towards the end of the decade, the country experienced rising inflation due to increased spending, particularly on the Vietnam War.

During this period, President Lyndon B. Johnson implemented a series of economic policies aimed at reducing unemployment, such as the War on Poverty and investment in infrastructure. These policies helped to keep the unemployment rate relatively low, but they also contributed to rising inflation. Additionally, the country experienced an increase in oil prices, which further drove up the inflation rate.

Therefore, in the 1960s in the United States, the inflation rate rose while the unemployment rate fell, making choice C the correct answer.

Question 12

The most prominent feature of the U.S. economy in the 1970s was:

Accepted Answer

The most prominent feature of the U.S. economy in the 1970s was cost-push inflation, which was caused by rising energy prices and increases in the costs of raw materials and labor. This led to higher prices for goods and services and a decline in purchasing power for consumers.

Question 13

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, a demand-pull inflation would be represented by a shift from:

Accepted Answer

Demand-pull inflation occurs when aggregate demand (AD) increases, shifting the AD curve to the right, from AD₁ to AD₂.

Question 14

Use the following to answer questions :
Short-run Phillips Curve 
-(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

Accepted Answer

As the short-run Phillips curve shifts from A to B to C to D, policymakers face a lower rate of inflation for any level of unemployment. This means that policymakers can achieve lower inflation rates without having to accept higher levels of unemployment. Therefore, the tradeoff between inflation and unemployment becomes less severe as the short-run Phillips curve shifts to the right.

Question 15

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

Accepted Answer

The Phillips curve analysis shows the negative tradeoff between inflation and unemployment in the short run only. In the long run, this relationship is not sustainable as inflation expectations adjust to the new rate of inflation, bringing the economy back to its natural rate of unemployment.

Question 16

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in ______.

Accepted Answer

Inflation inertia can be illustrated in an aggregate demand-aggregate supply model by an upward shift in the short-run aggregate supply curve due to increases in the expected price level, and an upward shift in the aggregate demand curve due to increases in the money supply. This reflects how expectations of higher prices can lead to wage and price adjustments that shift the supply curve, while increases in the money supply boost spending and demand.

Question 17

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, a cost-push inflation would be represented by a shift from:

Accepted Answer

Cost-push inflation is represented by a leftward shift of the aggregate supply curve, indicating a decrease in supply at every price level, which is what choice C describes.

Question 18

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

Accepted Answer

The answer of Inflation inertia is represented in the aggregate...

Question 19

In the case of demand-pull inflation, other things being equal:

Accepted Answer

Demand-pull inflation occurs when demand for goods and services exceeds supply, leading to an increase in prices. As a result, the inflation rate rises, but the unemployment rate falls because businesses must hire more workers in order to meet the increased demand. Therefore, option C is the best choice.

Question 20

The most prominent feature of the U.S. economy in the 1980s was:

Accepted Answer

The answer of The most prominent feature of the U.S....

Quiz 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

If the equation for a country's Phillips curve is $\pi$ = 0.02 - 0.8(u - 0.05) , where $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04) ?

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should aggregate demand at a cost of generating inflation.

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.

Cost-push inflation is the result of:

Inflation inertia refers to the idea that inflation:

In the case of cost-push inflation, other things being equal:

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

Demand-pull inflation is the result of:

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

The short-run Phillips curve:

In the 1960s, in the United States:

The most prominent feature of the U.S. economy in the 1970s was:

Use the following to answer questions : Short-run Phillips Curve -(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in , and the aggregate demand curve shifts upward because of increases in .

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

In the case of demand-pull inflation, other things being equal:

The most prominent feature of the U.S. economy in the 1980s was:

Quiz 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

If the equation for a country's Phillips curve is π\piπ = 0.02 - 0.8(u - 0.05) , where π\piπ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04) ?

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.

Cost-push inflation is the result of:

Inflation inertia refers to the idea that inflation:

In the case of cost-push inflation, other things being equal:

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

Demand-pull inflation is the result of:

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

The short-run Phillips curve:

In the 1960s, in the United States:

The most prominent feature of the U.S. economy in the 1970s was:

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to Yˉ\bar { Y }Yˉ and the price level equal to P1, a demand-pull inflation would be represented by a shift from:

Use the following to answer questions : Short-run Phillips Curve -(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in ______.

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to Yˉ\bar { Y }Yˉ and the price level equal to P1, a cost-push inflation would be represented by a shift from:

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

In the case of demand-pull inflation, other things being equal:

The most prominent feature of the U.S. economy in the 1980s was:

If the equation for a country's Phillips curve is $\pi$ = 0.02 - 0.8(u - 0.05) , where $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04) ?

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should aggregate demand at a cost of generating inflation.

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in , and the aggregate demand curve shifts upward because of increases in .