Inflation And Unemployment Chapter 16 Complete Test Bank

Chapter 16: Inflation and Unemployment

Multiple Choice

1. From 1992 through 2000, the United States experienced

A) rising unemployment and rising inflation.

B) falling unemployment and an inflation rate that was about 2% or less.

C) falling unemployment and an inflation rate that increased moderately over the period.

D) rising unemployment and a decreasing inflation rate.

Difficulty: Easy

2. The inflation rate can be measured as

A) the change in the average price level from one year to the next.

B) the change in the implicit price deflator from one year to the next.

C) the annual percentage change in the implicit price deflator from one year to the next.

D) the change in the consumer price index from one year to the next.

Difficulty: Medium

3. Which of the following characterizes the relationship between inflation and unemployment in the United States?

I. There have been periods in which a clear tradeoff between inflation and unemployment

seemed to exist.

II. There have been periods in which inflation and unemployment rose together.

III. There have been periods in which inflation and unemployment fell together.

A) I, II, and III

B) I and II

C) I and III

D) I only

Difficulty: Medium

4. Which of the following is a cost of unemployment?

I. output foregone

II. unemployment compensation that must be paid

III. rising inflation that erodes the value of money

A) I, II, and III

B) I and II

C) I and III

D) II and III

Difficulty: Medium

5. Which of the following economists came up with a theory regarding the tradeoff between

unemployment and inflation?

A) Almarin Phillips

B) John Maynard Keynes

C) Joseph Schumpeter

D) Milton Friedman

Difficulty: Easy

6. The notion that there is a tradeoff between inflation and unemployment is expressed as a

A) Phillips curve.

B) Keynes curve.

C) Schumpeter curve.

D) Friedman curve.

Difficulty: Easy

7. A Phillips curve implies

A) a negative relationship between consumption and saving.

B) a positive relationship between inflation and prices.

C) a negative relationship between inflation and unemployment.

D) a positive relationship between consumption expenditure and inflation.

Difficulty: Easy

8. Each point on a Phillips curve is a different combination of

A) aggregate output and the unemployment rate.

B) the inflation rate and the unemployment rate.

C) aggregate output and the inflation rate.

D) saving and disposable income.

Difficulty: Easy

9. Along an actual (observed) Phillips curve,

A) aggregate output varies inversely with the unemployment rate.

B) aggregate output directly inversely with the inflation rate.

C) the inflation rate varies inversely with the unemployment rate.

D) the inflation rate varies directly with the unemployment rate.

Difficulty: Easy

10. Suppose that an economy experiences an increase in the unemployment rate and a decline in

the inflation rate simultaneously. This situation would be consistent with a movement along a

A) vertical Phillips curve.

B) horizontal Phillips curve.

C) positively sloped Phillips curve.

D) negatively sloped Phillips curve.

Difficulty: Easy

Use the following to answer questions 11-13.

Exhibit: Inflation and Unemployment 1

11. (Exhibit: Inflation and Unemployment 1) Moving from B to A shows a tradeoff of

A) more unemployment for less inflation.

B) less unemployment for more inflation.

C) a fixed amount of unemployment for more inflation.

D) less unemployment for less inflation.

Difficulty: Easy

12. (Exhibit: Inflation and Unemployment 1) Consider point A where inflation is relatively high and unemployment is relatively low. In order to move down the curve toward point B, what fiscal policy measures should the policymakers undertake?

A) Decrease taxes and government spending

B) Increase taxes and government spending

C) Increase taxes and decrease government spending

D) Decrease taxes and increase government spending

Difficulty: Medium

13. (Exhibit: Inflation and Unemployment 1) Consider point B where unemployment is relatively high and inflation is relatively low. In order to move up the curve toward point A, what fiscal policy measures should the policymakers undertake?

A) Decrease taxes and government spending

B) Increase taxes and government spending

C) Increase taxes and decrease government spending

D) Decrease taxes and increase government spending

Difficulty: Medium

14. Suppose an economy is operating with an inflationary gap. In this case, policymakers would

seek to move the economy

A) back down the Phillips curve toward an unemployment rate that is closer to the natural rate

of unemployment.

B) up the Phillips curve toward an unemployment rate that is closer to the natural rate of

unemployment.

C) back down the Phillips curve toward an unemployment rate that is further from the natural

rate of unemployment.

D) up the Phillips curve toward an unemployment rate that is further from the natural

rate of unemployment.

Difficulty: Medium

15. Suppose an economy is operating with an inflationary gap. In this case, policymakers would

seek to move the economy

A) back down the Phillips curve, trading a reduction in unemployment for an increase in

inflation.

B) up the Phillips curve, trading a reduction in unemployment for an increase in inflation.

C) back down the Phillips curve, trading a reduction in inflation for an increase in

unemployment.

D) up the Phillips curve, trading a reduction in inflation for an increase in unemployment.

Difficulty: Medium

16. Suppose an economy is operating with a recessionary gap. In this case, policymakers would seek to move the economy

A) back down the Phillips curve toward an unemployment rate that is closer to the natural rate

of unemployment.

B) up the Phillips curve toward an unemployment rate that is closer to the natural rate of

unemployment.

C) back down the Phillips curve toward an unemployment rate that is further from the natural

rate of unemployment.

D) up the Phillips curve toward an unemployment rate that is further from the natural

rate of unemployment.

Difficulty: Medium

17. Suppose an economy is operating with a recessionary gap. In this case, policymakers would seek to move the economy

A) back down the Phillips curve, trading a reduction in inflation for an increase in

unemployment.

B) up the Phillips curve, trading a reduction in inflation for an increase in unemployment.

C) back down the Phillips curve, trading a reduction in unemployment for an increase in

inflation.

D) up the Phillips curve, trading a reduction in unemployment for an increase in inflation.

Difficulty: Medium

18. Which of the following statements is true of the U.S. experience with regards to the Phillips curve hypothesis?

I. Values of inflation and unemployment rates during the 1960s generally conformed to the tradeoff implied by the Phillips curve.

II. Annual observations of inflation and unemployment from 1961 to 2015 do not

seem consistent with a Phillips curve.

III. Annual observations of inflation and unemployment from 1961 to 2015 seem consistent

with a Phillips curve.

A) I only

B) II only

C) I and II only

D) III only

Difficulty: Medium

19. Which of the following statements is true of the U.S. experience with regards to the Phillips curve hypothesis?

I. Annual observations of inflation and unemployment from 1961 to 2015 seem consistent with a Phillips curve.

II. A Phillips curve relationship best fits observations of inflation and unemployment in the 1960s.

III. The Phillips curve relationship in the inflation and unemployment data began to disintegrate in the 1970s.

A) I only

B) II only

C) III only

D) II and III only

Difficulty: Medium

20. What are three phases of inflation-unemployment cycles?

A) An expansionary phase, a full-employment phase, and a contractionary phase

B) A Phillips phase, a stagflation phase, and a growth phase

C) A Phillips phase, a stagflation phase, and a recovery phase

D) An expansionary phase, a stagflation phase, and a recovery phase

Difficulty: Easy

21. A period marked by rising unemployment and high inflation is called a

A) inflationary phase.

B) stagflation phase.

C) Phillips phase.

D) recovery phase.

Difficulty: Easy

22. During a recovery phase,

A) inflation and unemployment both increase.

B) inflation and unemployment stay the same.

C) inflation and unemployment both decrease.

D) unemployment decreases and inflation increases.

Difficulty: Easy

23. During a stagflation phase,

A) inflation and unemployment both increase.

B) inflation and unemployment stay the same.

C) inflation and unemployment both decrease.

D) unemployment decreases and inflation increases.

Difficulty: Easy

24. Stagflation implies that

A) policymakers can choose to have less unemployment if they are willing to accept a higher

rate of inflation.

B) a tradeoff between inflation and unemployment may not always exist.

C) any relationship between the inflation and unemployment was purely random.

D) the relationship predicted by the Phillips curve is stable.

Difficulty: Medium

25. During a Phillips phase,

A) inflation and unemployment both increase.

B) inflation and unemployment stay the same.

C) inflation and unemployment both decrease.

D) unemployment decreases and inflation increases.

Difficulty: Easy

26. A period characterized by declining inflation and unemployment is called a

A) economic growth phase.

B) stagflation phase.

C) recovery phase.

D) Phillips phase.

Difficulty: Easy

Use the following to answer questions 27-31.

Exhibit: Inflation and Unemployment 2

27. (Exhibit: Inflation and Unemployment 2) The figure shows the three inflation-unemployment

phases. What are these three phases, moving clockwise from point A?

A) Phillips phase, recovery phase, stagflation phase

B) Recovery phase, stagflation phase, Phillips phase

C) Phillips phase, stagflation phase, recovery phase

D) Stagflation phase, recovery phase, Phillips phase

Difficulty: Medium

28. (Exhibit: Inflation and Unemployment 2) Which of the following movements represents a Phillips phase?

A) The movement from A to B

B) The movement from B to C

C) The movement from C to D

D) The movement from B to A

Difficulty: Medium

29. (Exhibit: Inflation and Unemployment 2) Which of the following movements represents a recovery phase?

A) The movement from A to B

B) The movement from B to C

C) The movement from C to D

D) The movement from C to B

Difficulty: Medium

30. (Exhibit: Inflation and Unemployment 2) Consider the following statement: “The nation’s inflation rate rose to a record high last month, the government reported yesterday. The consumer price index jumped 0.3% in January. Coupled with the announcement earlier this month that unemployment had risen by 0.5 percentage points, the reports suggested that the first month of President Nixon’s second term had gotten off to a rocky start.” Which of the following movements represents the statement?

A) The movement from A to B

B) The movement from B to C

C) The movement from C to D

D) The movement from C to B

Difficulty: Medium

31. (Exhibit: Inflation and Unemployment 2) Which of the following represents a stagflation phase?

A) The movement from A to B

B) The movement from B to C

C) The movement from C to D

D) The movement from A to C

Difficulty: Medium

32. Prior to the 1970s, the model of choice was the aggregate expenditures model. According to

this model, if the economy was in equilibrium below full employment, then the primary economic problem would be

A) unemployment.

B) deflation.

C) financing the government budget deficit.

D) financing unemployment compensation.

Difficulty: Medium

33. Prior to the 1970s, the model of choice was the aggregate expenditures model. According to

this model, if the economy was in equilibrium at an income greater than the full employment level, then the primary economic problem would be

A) excessive bank lending.

B) potential crises in financial markets.

C) inflation.

D) excess aggregate demand.

Difficulty: Medium

34. Rising inflation means

A) that the price level is increasing by a given percentage rate.

B) that the prices of all goods and services increase from year to year.

C) that the price level is rising at an increasing rate.

D) that the price level is rising at a variable rate.

Difficulty: Medium

35. Falling inflation means

A) that the price level is falling from one period to the next.

B) that the price level is falling at a decreasing rate.

C) that the price level is falling at an increasing rate.

D) that the price level is increasing at a decreasing rate.

Difficulty: Medium

36. In the late 1970s, the U.S. economy entered a stagflation phase characterized by

A) unemployment below its natural rate and rising inflation

B) unemployment above its natural rate and rising inflation.

C) unemployment at its natural rate and rising inflation.

D) unemployment above its natural rate and constant inflation.

Difficulty: Medium

Use the following to answer questions 37-41.

Exhibit: The Inflation-Unemployment Cycle

37. (Exhibit: The Inflation-Unemployment Cycle) If the economy were experiencing a recessionary gap, it would be at the intersection of short-run aggregate supply and aggregate demand at point(s):

A) 1 only.

B) 1 or 2.

C) 3 only.

D) 4.

Difficulty: Medium

38. (Exhibit: The Inflation-Unemployment Cycle) Expansionary policy to counter a recessionary gap would move the economy from point:

A) 1 to 2.

B) 3 to 2.

C) 3 to 4.

D) 4 to 3.

Difficulty: Medium

39. (Exhibit: The Inflation-Unemployment Cycle) Expansionary policy to counter a recessionary gap would lead to a:

A) higher price level and higher unemployment level.

B) lower price level and less unemployment.

C) higher price level and less unemployment.

D) lower price level and more employment.

Difficulty: Medium

40. (Exhibit: The Inflation-Unemployment Cycle) Because of lags in the application of expansionary policy to counter a recessionary gap, the economy may:

A) not experience any change in the price level or level of unemployment.

B) move past full employment and enter an inflationary gap situation.

C) fall into deeper recession.

D) experience a fall in the price level as illustrated by the move from point 3 to point 1.

Difficulty: Medium

41. (Exhibit: The Inflation-Unemployment Cycle) The shifts of AD from point 1 to 2 to 3 to 4 are characteristic of the _______ phase of the inflation-unemployment cycle.

A) stagflation

B) recovery

C) Phillips

D) advanced

Difficulty: Medium

42. In the short run, if the economy is in a Phillips phase of the inflation-unemployment relationship, an increase in aggregate demand will generate

A) an increase in the price level and an increase in the unemployment rate.

B) an increase in the price level and a decrease in the unemployment rate.

C) an increase in the price level and no change in the unemployment rate.

D) a decrease in the price level and an increase in the unemployment rate.

Difficulty: Medium

43. The Phillips phase of the inflation-unemployment relationship drives the price level

A) below what workers and firms expected causing nominal wages to fall below their

expected level.

B) below what workers and firms expected causing real wages to rise above their expected level.

C) above what workers and firms expected causing nominal wages to rise above their expected level.

D) above what workers and firms expected causing real wages to fall below their expected level.

Difficulty: Medium

44. The Phillips phase of the inflation-unemployment relationship emerges because

A) prices and wages are flexible.

B) nominal wages and prices fall.

C) of unanticipated increases in the price level produced by increases in aggregate demand.

D) people are reluctant to spend despite expansionary policies pursued by policymakers.

Difficulty: Medium

45. The Phillips phase of the inflation-unemployment relationship emerges because

A) prices and wages are sticky.

B) nominal wages and prices fall.

C) the economy is stuck in an equilibrium below full employment.

D) people fully expect the price increases produced by increases in aggregate demand.

Difficulty: Medium

Use the following to answer questions 46-48.

Exhibit: Aggregate Demand Shifts and Expectations

46. (Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms become aware of a rise in the general price to P_g?

A) Workers will agree to take wage cuts and firms will agree to lower prices to ward off

inflation.

B) They will revise their expectations of future prices to incorporate the higher price level.

C) Firms with sticky prices will ultimately adjust their prices downward.

D) Firms and workers will agree to renegotiate wage contracts downward.

Difficulty: Medium

47. (Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms adjust their expectations in a higher price level and act on these expectations?

A) The aggregate demand curve shifts to the left until it intersects the long-run aggregate supply

(LRAS) curve.

B) The short-run aggregate supply (SRAS) curve shifts to the right.

C) The SRAS curve shifts to the left.

D) Both the LRAS and the SRAS curves shift to the right.

Difficulty: Medium

48. (Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. When workers and firms adjust their expectations in a higher price level and act on these expectations, the economy moves from a

A) expansionary phase to a recovery phase.

B) Phillips phase to a stagflation phase.

C) Phillips phase to a recovery phase.

D) stagflation phase to a recovery phase.

Difficulty: Medium

49. In a stagflation phase, a decrease in short-run aggregate supply will generate

A) an increase in the inflation rate and in the unemployment rate.

B) an increase in the inflation rate and a decrease in the unemployment rate.

C) an increase in the inflation rate with no change in the unemployment rate.

D) a decrease in the inflation rate and an increase in the unemployment rate.

Difficulty: Medium

50. The essential feature of a stagflation phase is

A) a shift in the short run aggregate supply curve to the right.

B) changes in expectations about the price level.

C) falling unemployment and rising inflation.

D) a shift of the LRAS curve to the right.

Difficulty: Medium

51. The critical feature of a

A) Phillips phase is a change in unemployment and inflation in the same direction.

B) recovery phase is a change in inflation and unemployment in the opposite direction.

C) stagflation phase is a change in nominal wages and expectations.

D) expansion phase is a change in the rate of change in real wages and real GDP.

Difficulty: Medium

Use the following to answer questions 52-58.

Exhibit: AD-AS and the Inflation-Unemployment Cycle

52. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) Suppose initially the economy was at point 1 and as a result of

stabilization policies, it is now at point 3. Consequently, there will be pressure for

A) workers to settle for lower nominal wages.

B) firms to decrease prices.

C) workers and firms to incorporate price increases into their expectations.

D) the Fed to buy bonds in the open market.

Difficulty: Medium

53. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) If the economy is in equilibrium at point 3,

A) it will most likely stay there for an indeterminate period.

B) the SRAS will most likely shift to the left because of firms and workers asking for higher

prices and wages.

C) it will move to point 5 because of a shift in the aggregate supply curve from SRAS₁ to SRAS₂.

D) it will move to point 2 because the aggregate demand curve is likely to shift left in response

to higher prices.

Difficulty: Medium

54. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) The movement from

A) point 1 to point 2 is representative of a recovery phase.

B) point 3 to point 4 is representative of a stagflation phase.

C) point 3 to point 2 is representative of a recovery phase.

D) point 4 to point 3 is representative of a Phillips phase.

Difficulty: Medium

55. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) The movement from point 3 to point 4 is consistent with which phase

of the inflation-unemployment relationship?

A) Phillips phase because inflation is increasing while unemployment is falling

B) recovery phase because although inflation has risen, unemployment is closer to its natural

rate

C) stagflation phase because inflation and unemployment have risen

D) recovery phase because the inflationary gap has been eliminated

Difficulty: Medium

56. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) Over time, the aggregate supply curve shifts from SRAS₁ to SRAS₂

because of

A) rising output prices.

B) economic agents adjust their expectations regarding prices and wages downwards.

C) a fall in nominal wages.

D) economic agents adjust their expectations regarding prices and wages upwards.

Difficulty: Medium

57. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) At point 4, the economy is experiencing

A) an inflationary gap.

B) a recessionary gap.

C) long-run equilibrium.

D) a recovery.

Difficulty: Medium

58. (Exhibit: AD-AS and the Inflation-Unemployment Cycle) At point 4, if policymakers are concerned about economic performance, they will most likely respond by

A) increasing government purchases and the money supply.

B) increasing taxes.

C) decreasing aggregate demand.

D) having the Fed sell bonds.

Difficulty: Medium

59. In a recovery phase, a falling rate of inflation means that the price level is

A) falling.

B) falling at an increasing rate.

C) rising by smaller and smaller percentages.

D) falling at a constant rate.

Difficulty: Medium

60. In a recovery phase,

A) inflation and unemployment fall.

B) inflation rises as unemployment falls.

C) inflation falls as unemployment rises.

D) inflation and real GDP rise.

Difficulty: Medium

61. In a recovery phase,

A) the inflation rate rises.

B) although the price level rises, the inflation rate falls.

C) the price level falls.

D) the price level and the inflation rate fall.

Difficulty: Medium

62. Which of the following statements is true?

A) The aggregate demand-aggregate supply model attempts to explain the equilibrium level of

real GDP and the price level.

B) The aggregate demand-aggregate supply model gives us inflation and the various levels of

real GDP.

C) The inflation-unemployment relationships attempt to explain the equilibrium level of real GDP.

D) The inflation-unemployment phases are based on movements up and down the Phillips curve.

Difficulty: Medium

63 A recovery phase is explained by

A) rightward shifts of the short-run aggregate supply curve in response to expansionary policies.

B) rightward shifts of the aggregate demand curve in response to expansionary policies.

C) leftward shifts of the short-run aggregate supply curve in response to higher prices.

D) leftward shifts of the aggregate demand curve in response to higher prices.

Difficulty: Medium

Use the following to answer questions 64-67.

Exhibit: Shifts in Aggregate Demand and Aggregate Supply and Inflation-Unemployment Phases

64. (Exhibit: Shifts in Aggregate Demand and Aggregate Supply and Inflation-Unemployment Phases) The movement from point 4 to point 5 is consistent with which inflation-unemployment phase?

A) Phillips phase because inflation is increasing while unemployment is falling

B) recovery phase because although inflation has risen, unemployment has fallen

C) growth phase because the economy is producing above its potential output

D) recovery phase because inflation and unemployment have fallen

Difficulty: Medium

65. (Exhibit: Shifts in Aggregate Demand and Aggregate Supply and Inflation-Unemployment Phases) The recessionary gap at point 4 was created

A) during the Phillips phase that occurred when the economy moved from point 3 to point 4.

B) when policymakers pursued expansionary policies to move the economy from point 3 to

point 4.

C) during the stagflation phase that occurred when the economy moved from point 3 to point 4.

D) during the recovery phase when economic agents revised their price expectations in higher

prices.

Difficulty: Medium

66. (Exhibit: Shifts in Aggregate Demand and Aggregate Supply and Inflation-Unemployment Phases) The movement from point 4 to point 5 is consistent with which

segment in the diagram below?

A) Segment A to D

B) Segment A to B

C) Segment B to C

D) Segment C to D

Difficulty: Medium

67. (Exhibit: Shifts in Aggregate Demand and Aggregate Supply and Inflation-Unemployment Phases) The movement from point 3 to point 4 is consistent with which

segment in the diagram below?

A) Segment A to D

B) Segment A to B

C) Segment B to C

D) Segment C to D

Difficulty: Medium

68. Which of the following affect the values of inflation and unemployment?

I. changes in government spending II. expectations about the price level

III. changes in nominal wages IV. changes in money supply

A) I and IV only

B) I, II, and IV only

C) II and III only

D) I, II, III, and IV

Difficulty: Medium

69. Consider the following statement: “President X expressed concern about reports of rising inflation but insisted the economy is on the right course. He pointed to recent reductions in unemployment as evidence that his economic policies are working.” Identify the stage of the inflation–unemployment relationship.

A) The stagflation phase

B) The recovery phase

C) The Phillips phase

D) The contraction phase

Difficulty: Medium

70. Consider the following statement: “President X expressed concern about reports of rising inflation but insisted the economy is on the right course. He pointed to recent reductions in unemployment as evidence that his economic policies are working.” Which of the following could have caused this phenomenon?

A) Increase in government spending that shifted the aggregate demand curve to the right.

B) Increase in money supply which lowered interest rates and shifted the short-run aggregate

supply curve to the right.

C) Economic agents revising their expectations about the price level resulting in the short-run aggregate supply curve shifting to the left.

D) Expansionary fiscal and monetary policies that shifted the long-run aggregate supply curve to the right.

Difficulty: Medium

71. Consider the following statement: “President X expressed satisfaction with last year’s economic performance. He said that with inflation and unemployment heading down, the nation ‘is on the right course’. ” Identify the stage of the inflation–unemployment phase.

A) the stagflation phase

B) the recovery phase

C) the Phillips phase

D) the growth phase

Difficulty: Medium

72. Consider the following statement: “President X expressed satisfaction with last year’s economic performance. He said that with inflation and unemployment heading down, the nation ‘is on the right course.’” Which of the following could have caused this phenomenon?

A) Economic agents revising their expectations about the price level resulting in the short-run aggregate supply curve shifting to the left.

B) Expansionary fiscal and monetary policies that shifted the aggregate demand curve to the right.

C) Increase in money supply which lowered interest rates and shifted the short-run aggregate

supply curve to the right.

D) Expansionary fiscal and monetary policies that shifted the long-run aggregate supply curve to the right.

Difficulty: Medium

73. Since 1979 when inflation soared into the double-digit, the Federal Reserve’s policies

A) have been focused on moving the economy to its potential output.

B) have clearly shown a reduced tolerance for inflation.

C) were concentrated on bringing the price of oil down.

D) have moved toward restraining growth in financial markets.

Difficulty: Medium

74. In early in 1994, the Federal Reserve shifted to a contractionary policy although the economy

was still in a recessionary gap left over from the 1990–1991 recession. Which of the

following best explains this move?

A) The Fed was concerned that the budget deficit would increase.

B) The Fed had failed to take into account the lag in monetary policy.

C) The Fed was taking explicit account of the lag in monetary policy.

D) The Fed wanted to avert a potential housing market crisis.

Difficulty: Medium

75. In the United States, through most of the 1990s, the unemployment rate and the inflation rate generally fell. With which phase of the inflation-unemployment relationship does this conform to?

A) Phillips phase

B) Growth phase

C) Stagflation phase

D) Recovery phase

Difficulty: Medium

76. In the long run, sustained inflation is due to

A) a one-time increase in money growth.

B) a continuous increase in the money growth rate.

C) a continuous increase in aggregate demand.

D) the rising price of oil.

Difficulty: Medium v

77. Which of the following determines the rate of inflation in the long run?

I. the rate of money growth

II. changes in expectations about the price level

III. the rate of economic growth

IV. changes in government spending

A) I and II only

B) I and III only

C) I, II, and III only

D) I, II, III, and IV

Difficulty: Medium

78. Using the equation of exchange, the rate of money growth can be expressed as

A) %∆M × %∆V = (%∆P × %∆Y) ÷ %∆V

B) %∆M = (%∆P + %∆Y) ÷ %∆V

C) %∆M = %∆P + %∆Y − %∆V

D) M × V = P × Y

Difficulty: Medium

79. In the equation of exchange, if velocity is stable,

A) %∆V = 0.

B) %∆V = 1.

C) %∆V is a positive constant value > 0.

D) %∆V = infinity.

Difficulty: Easy

80. Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P)

can be expressed as

A) %∆P = %∆M ÷ %∆Y

B) %∆P = %∆M + %∆Y

C) %∆P = %∆M × %∆Y

D) %∆P = %∆M − %∆Y

Difficulty: Medium

81. Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

A) If %∆M = %∆ Y_P , then %∆P = %∆M.

B) If %∆M > %∆ Y_P , then %∆P > 0.

C) If %∆M > %∆ Y_P , then %∆P > %∆M.

D) If %∆M = %∆ Y_P , then %∆P < 0.

Difficulty: Difficult

82. Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

A) If %∆M > %∆ Y_P , then %∆P > %∆M.

B) If %∆M > %∆ Y_P , then %∆P > %∆ Y_P.

C) If %∆M = %∆ Y_P , then %∆P = 0.

D) If %∆M = %∆ Y_P , then %∆P < 0.

Difficulty: Difficult

83. Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

A) If the money supply grows at a faster rate than growth in Y_P, there will be inflation.

B) If the money supply grows at a slower rate than growth in Y_P, there will be a decrease in the inflation rate.

C) If the money supply grows at the same rate as growth in Y_P, the price level will fall and there will be deflation.

D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P.

Difficulty: Difficult

84. Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

A) If the growth rate in Y_P exceeds the money growth rate, there will be inflation.

B) If the money growth rate is less than the growth rate in Y_P, there will be deflation.

C) If the money supply grows at the same rate as growth in Y_P, the price level will grow at a constant rate.

D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P.

Difficulty: Difficult

85. Suppose the full-employment level of real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?

A) 7%

B) 4%

C) 1%

D) −1%

Difficulty: Medium

86. Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

A) 7%

B) 4%

C) 1%

D) −1%

Difficulty: Medium

87. Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

A) 6%

B) 3%

C) 1%

D) 0%

Difficulty: Medium

88. Suppose that rising productivity increases potential output in each period by 4%. Using the equation of exchange, what kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

A) It should keep money supply constant.

B) It should increase money supply by 4% per period.

C) It should increase money supply by 4% in the first period and thereafter, hold money supply constant.

D) It should decrease money supply by 4% each period.

Difficulty: Medium

89. Evidence suggests that in general countries with very high

A) inflation rates also have very high money growth rates.

B) unemployment rates also have very high GDP growth rates.

C) GDP growth rates also have very high government budget deficits.

D) government budget deficits also have very high inflation rates.

Difficulty: Medium

90. Which of the following statements is true? Economists generally agree that

A) the rate of inflation in the long run is determined primarily by growth in government spending.

B) factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause sustained inflation.

C) the primary cause of inflation is increases in the money supply growth that exceed growth increases in aggregate demand.

D) the major causes of inflation are declining productivity coupled with excessive spending.

Difficulty: Medium

91. In the long-run, only a change in the _______ is likely to affect the inflation rate associated

with a particular rate of growth in the money supply.

A) aggregate demand

B) short-run aggregate supply

C) rate of economic growth

D) expectations about the price level

Difficulty: Medium

92. In the long run, monetary growth

A) can change the unemployment rate only at the cost of increased inflation.

B) can change the unemployment rate while holding the inflation rate constant.

C) can promote economic growth.

D) cannot affect the factors that determine the economy’s unemployment rate.

Difficulty: Medium

93. In general, economists believe that the Phillips curve is

A) downward sloping with a steeper slope in the long run than in the short run.

B) downward sloping with a steeper slope in the short run than in the long run.

C) downward sloping in the short run but vertical in the long run.

D) could be horizontal in the short run but always vertical in the long run.

Difficulty: Medium

94. In the long run, unemployment

I. will be at the natural rate of unemployment.

II. is made up of structural and frictional unemployment.

III. could be made up of structural, frictional, and cyclical unemployment.

A) I, II, and III

B) I and III only

C) I and II only

D) I only

Difficulty: Medium

95. In the long run, unemployment will be at the natural rate. This implies that

A) there is a one-to-one relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.

B) there is no relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.

C) there is a positive relationship between unemployment and inflation and consequently, the long-run Phillips curve is upward-sloping.

D) there is a negative relationship between unemployment and inflation and consequently, the long-run Phillips curve is downward-sloping.

Difficulty: Medium

96. The vertical long-run Phillips curve occurs in the long run because

A) the aggregate supply curve is vertical which means that changes in aggregate demand will not change unemployment.

B) wage and price rigidities prevent changes in aggregate demand to change unemployment.

C) economic agents are quick to respond to changes in the price level.

D) of lags in monetary and fiscal policies.

Difficulty: Medium

97. Frictional unemployment exists because

A) the quantity demanded of labor exceeds the quantity supplied at the equilibrium wage rate.

B) of fluctuations in economic activity.

C) technological changes make the skills of the workers incompatible with the skills used on the

job.

D) it takes time for people seeking jobs and employers seeking workers to find each other.

Difficulty: Easy

98. The lowest wage that a worker would accept, if offered a job, is called

A) the reservation wage.

B) a subsistence wage.

C) the exploitation wage.

D) the equilibrium market wage.

Difficulty: Easy

99. What is a reservation wage?

A) It is the highest wage that an unemployed worker would accept, if it were offered.

B) It is the lowest wage that an unemployed worker would accept, if it were offered.

C) It is the highest wage that an employer will offer a potential worker if there are many candidates vying for the job.

D) It is the lowest wage that an unemployed worker would accept, excluding any non-pecuniary benefits.

Difficulty: Easy

100. As the duration of job search increases, there will likely be

A) an increase in the reservation wage and an increase in the best offer received.

B) an increase in the reservation wage and a decrease in the best offer received.

C) a decrease in the reservation wage and an increase in the best offer received.

D) a decrease in the reservation wage and a decrease in the best offer received.

Difficulty: Medium

101. In general, the duration of job search will be shorter if

A) less job-market information is available.

B) it is more costly to obtain job-search information.

C) there are fewer employment agencies.

D) unemployment compensation benefits decrease.

Difficulty: Medium

102. Structural unemployment exists because

A) workers may not be willing to accept jobs at the going wage rate.

B) of fluctuations in economic activity.

C) technological changes make the skills of the workers incompatible with the skills used on the

job.

D) it takes time for people seeking jobs and employers seeking workers to find each other.

Difficulty: Medium

103. Structural unemployment is best reduced by

A) job training programs to retool workers with new skills.

B) improved job-market information.

C) an increasing unemployment compensation benefits.

D) offering above equilibrium wages to attract workers.

Difficulty: Medium

104. The theory that holds that firms may try to increase productivity by paying a wage in excess of the market-clearing wage is called the

A) efficiency-wage theory.

B) reservation wage theory.

C) excess wage theory.

D) wage-inflation theory.

Difficulty: Easy

105. If the efficiency wage theory holds,

A) only highly qualified, efficient workers get the jobs.

B) the labor market clears at the equilibrium wage rate in the long-run.

C) workers with jobs will receive high wages and workers without jobs would be willing to

work for lower wages but are closed out of the market.

D) the labor market is efficient.

Difficulty: Medium

106. If the efficiency wage theory holds,

A) wage rigidity that perpetuates a recessionary gap is transformed from a temporary

phenomenon to a permanent feature.

B) self-correction will automatically eliminate a recessionary gap.

C) increases in real wages will be required to eliminate a recessionary gap.

D) increases in nominal wages will be required to close a recessionary gap.

Difficulty: Medium

107. Efficiency wages cause unemployment because

A) firms pay wages that are below the market wage, causing the quantity of labor demanded to

be greater than the quantity of labor supplied.

B) firms pay wages that are below the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied.

C) firms pay wages that are above the market wage, causing the quantity of labor demanded to be greater than the quantity of labor supplied.

D) firms pay wages that are above the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied.

Difficulty: Medium

108. The efficiency-wage theory predicts that

A) profit-maximizing firms will maintain the wage level at a rate too low to achieve full employment in the labor market.

B) wage rigidities will be eliminated even in the short-run.

C) firms will maintain the wage level at a rate too high to achieve full employment in the labor market.

D) the labor market clears at a wage rate above equilibrium.

Difficulty: Medium

True/False

1. The short-run Phillips curve implies a positive relationship between inflation and unemployment.

2. In the 1960s and early 70s, economists believed that the short-run Phillips curve indicated that policymakers could choose the mix of inflation and unemployment they were willing to accept and achieved this with appropriate fiscal and monetary policies.

3. A Phillips phase of the inflation-unemployment relationship occurs when both inflation and

unemployment increase.

4. Expectations of higher inflation rates cause a leftward shift in the short-run aggregate

supply curve and usher in a stagflation phase of the inflation-unemployment relationship.

5. In the long run, the major cause of inflation is excessive government spending.

6. The reservation wage tends to increase as the duration of unemployment increases.

7. The efficiency-wage theory holds that the market equilibrium wage is the efficient wage.

8. The notion that there is a tradeoff between inflation and unemployment is expressed as an

efficiency wage curve.

9. The relationship between inflation and unemployment suggested by the experience of the

1960s was supported by the results in the U.S. economy from 1970 to 2015.

10. In the recovery phase of the inflation-unemployment relationship, a falling rate of inflation implies a falling price level.

11. In a recovery phase, a falling inflation rate means that the price level is rising by smaller and smaller percentages.

12. For a given labor force, an increase in real GDP implies a decrease in unemployment.

13. A Phillips phase emerges because wages are flexible and adjust more quickly than anticipated.

14. If workers and firms adjust their expectations of future prices in a higher price level, the

short-run aggregate supply curve shifts to the right.

15. In the short run and in the long run, there is a tradeoff between inflation and

unemployment.

16. In a Phillips phase, real GDP rises and inflation falls.

17. In a Phillips phase, the short-run aggregate supply

curve shifts to the right.

18. Sustained inflation over many years is most likely due to increases in the money supply in

excess of increases in potential output.

19. Other things equal, a decrease in the money supply is expected to shift the AD curve to the left.

20. The lowest wage that a worker would accept if offered a job is called the subsistence wage.

21. The efficiency-wage theory holds that self-correction in an economy will not automatically

eliminate a recessionary gap.

Short Answer

1a. Economists distinguish three types of unemployment. What are they?

b. The Phillips curve hypothesis implies a tradeoff between inflation and unemployment. What type of unemployment exists behind this tradeoff?

2. What are the three phases of the inflation-unemployment relationship? What are the critical

features that mark these phases?

3. If a Phillips curve relationship between inflation and unemployment was completely valid at all times, would this be a good thing? Would this create any problems for policymakers? Explain.

4. Use the theory behind the equation of exchange to demonstrate that “inflation is always and everywhere a monetary phenomenon.”

5. The Phillips curve hypothesis provides support for active stabilization policies. Explain in words and illustrate using a graph of aggregate-demand and aggregate supply.