48. Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting
a.
aggregate demand to the right.
b.
aggregate demand to the left.
c.
aggregate supply to the right.
d.
aggregate supply to the left.
49. Refer to The Economy in 2008. In the short run the increased prices of world commodities
a.
raised both the price level and output.
b.
raised the price level and reduced output.
c.
reduced the price level and raised output.
d.
reduced both the price level and output.
50. Refer to The Economy in 2008. Given the effects of the financial and housing crisis on the price level and output and
the effects of increased world commodity prices on the price level and output, the aggregate demand and aggregate supply
model tells us that
a.
b.
c.
d.
51. Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by
a.
moving to the right along the short-run Phillips curve.
b.
moving to the left along the short-run Phillips curve.
c.
shifting the short-run Phillips curve right.
d.
shifting the short-run Phillips curve left.
52. Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises
a.
raise both inflation and the unemployment rate.
b.
raise the inflation rate and reduce the unemployment rate.
c.
reduce the inflation rate and raise the unemployment rate.
d.
reduce both the inflation rate and the unemployment rate.
53. Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by
a.
moving to the right along the short-run Phillips curve.
b.
moving to the left along the short-run Phillips curve.
c.
shifting the short-run Phillips curve right.
d.
shifting the short-run Phillips curve left.
54. If a central bank attempts to lower the inflation rate but the public doesn’t believe the inflation rate will fall as far as
the central bank says, then in the short run unemployment
a.
rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
b.
rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
c.
falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
d.
falls. As inflation expectations adjust, the short-run Phillips curve shifts left.
55. Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its
expectation of inflation. Then, in the short run, unemployment
a.
rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
b.
rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
c.
falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
d.
falls. As inflation expectations adjust, the short-run Phillips curve shifts left.
56. Other things the same, a country that decides to reduce inflation will
a.
have a higher unemployment rate in the short run and the long run.
b.
have a higher unemployment rate only in the long run.
c.
have a higher unemployment rate only in the short run.
d.
not have a higher unemployment rate in either the short run or the long run.
57. The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a
disinflationary policy that the public does not find completely credible
a.
should not see an increase in the unemployment rate even in the short run.
b.
will having rising unemployment for a while, but then return to the natural rate of unemployment.
c.
will have a permanently higher unemployment rate.
d.
None of the above is suggested by the arguments of Friedman and Phelps.
58. The monetary-policy framework called inflation targeting is used explicitly by
a.
no major country.
b.
most major countries except the United States and Japan.
c.
the United States, but it is not used by other major countries.
d.
most major countries, including the United States and Japan.
59. If inflation expectations rise, the short-run Phillips curve shifts
a.
left. If inflation remains the same, unemployment falls.
b.
left. If inflation remains the same, unemployment rises.
c.
right. If inflation remains the same, unemployment falls.
d.
right. If inflation remains the same, unemployment rises.
Monetary Policy in Flosserland
In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25%
for many years.
60. Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time.
Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.
a.
both the Classical dichotomy and the long-run Phillips curve
b.
the Classical dichotomy, but not the long run Phillips curve
c.
the long-run Phillips curve, but not the Classical dichotomy
d.
neither the long-run Phillips curve nor the Classical dichotomy
61. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public
relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If
Flosserlanders believe their government then which, if any, curve(s) shift left?
a.
the short-run and the long-run Phillips curve
b.
the short-run but not the long run Phillips curve
c.
the long-run but not the short-run Phillips curve
d.
neither the short-run nor the long-run Phillips curve
62. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public
relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the
public had expected that the Department of Finance would reduce inflation, but only to 20%. Then
a.
unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
b.
unemployment falls, but it would have fallen more if people had been expecting 22% inflation.
c.
unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
d.
unemployment rises, but it would have risen more if people had been expecting 22% inflation.
63. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public
relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose
that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
a.
unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
b.
unemployment falls, but it would have fallen more if people had been expecting 25% inflation.
c.
unemployment rises, but it would have risen more if people had been expecting 12.5% inflation.
d.
unemployment rises, but it would have risen more if people had been expecting 25% inflation.
64. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public
relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the
public had expected that the Department of Finance would reduce inflation but only to 22%. Then
a.
unemployment falls, but it would have fallen less if people had been expecting 12.5% inflation.
b.
unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
c.
unemployment rises, but it would have risen less if people had been expecting 12.5% inflation.
d.
unemployment rises, but it would have risen less if people had been expecting 25% inflation.
65. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public
relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose
that the public was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation
to 30% so it could increase its expenditures. Then
a.
unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
b.
unemployment falls, but it would have fallen less if people had been expecting 35% inflation.
c.
unemployment rises, but it would have risen less if people had been expecting 25% inflation.
d.
unemployment rises, but it would have risen less if people had been expecting 35% inflation.
66. Refer to Monetary Policy in Flosserland. Suppose the Flosserland Department of Finance has run a public relations
campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level. Suppose at first that the
public thought inflation would only drop to 18%, but eventually become convinced that the inflation rate will stay at
12.5%.
a.
unemployment rises in the short run, and remains higher than it’s original value in the long run.
b.
unemployment rises in the short run, and is the same as it’s original value in the long run.
c.
unemployment falls in the short run, and is lower than it’s original value in the long run.
d.
unemployment falls in the short run, and is the same as it’s original value in the long run.
Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the
hopes of reducing the inflation rate.
67. Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to
5%. If Mokanians lower their inflation expectations, which curve shifts to the left?
a.
both the short-run and the long-run Phillips curves
b.
neither the short-run nor the long-run Phillips curves
c.
only the short-run Phillips curve
d.
only the long-run Phillips curve
68. Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%.
If it is successful in doing so but people had expected inflation to fall only to 10%, then
a.
unemployment rises but it would have risen by more if people had expected inflation to be 6%.
b.
unemployment rises but it would have risen by less if people had expected inflation to be 6%.
c.
unemployment falls but it would have fallen by more if people had expected inflation to be 6%.
d.
unemployment falls but it would have fallen by less if people had expected inflation to be 6%.
69. Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to
5%. If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%, then
a.
unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5%
rather than 3%.
b.
unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather
than 3%.
c.
unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5%
rather than 3%.
d.
unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather
than 3%.
70. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%.
However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent
for a year. Which of the following is correct?
a.
Initially people’s inflation expectations had been higher than 5%. The sacrifice ratio was 3.
b.
Initially people’s inflation expectations had been higher than 5%. The sacrifice ratio was 1.
c.
Initially people’s inflation expectations had been lower than 5%. The sacrifice ratio was 3.
d.
Initially people’s inflation expectations had been lower than 5%. The sacrifice ratio was 1.
71. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%.
However the unemployment rate was on average higher for many years after. A newspaper editorial argues that the
unemployment rate had moved to this higher natural rate because (1) by itself the decrease in inflation had permanently
increased unemployment and (2) that at the same time the central bank was fighting inflation the government of Mokania
had made a large increase in the minimum wage. Which of these arguments is consistent with the Phillip’s curve model?
a.
both explanations 1 and 2
b.
neither explanation 1 nor 2
c.
explanation 1 but not explanation 2
d.
explanation 2 but not explanation 1
72. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%.
However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of
the following made unemployment lower than otherwise?
a.
both people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
b.
neither people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
c.
only the favorable supply shock
d.
only people expecting inflation to fall to 7% instead of 5%
73. Which of the following is not correct?
a.
In the short run, policymakers face a tradeoff between inflation and unemployment.
b.
Events that shift the long-run Phillips curve right shift the long-run aggregate supply curve left.
c.
Unemployment can be changed only by the use of government policy.
d.
The decrease in output associated with reducing inflation is less if the policy change is announced ahead of
time and is credible.
74. Most economists believe that a tradeoff between inflation and unemployment exists
a.
only in the short run.
b.
only in the long run.
c.
in both the short and long run.
d.
in neither the short nor long run.
75. The long-run response to a decrease in the money supply growth rate is shown by shifting
a.
the short-run and long-run Phillips curves left.
b.
the short-run and long-run Phillips curves right.
c.
only the short-run Phillips curve left.
d.
only the short-run Phillips curve right.
76. The long-run response to an increase in the growth rate of the money supply is shown by shifting
a.
the short-run and long-run Phillips curves left.
b.
the short-run and long-run Phillips curves right.
c.
only the short-run Phillips curve left.
d.
only the short-run Phillips curve right.
77. If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and
unemployment rise 5 percentage points for one year, the sacrifice ratio is
a.
5/2.
b.
3/2.
c.
2/3.
d.
2/5.
78. Other things the same, if the central bank decreases the rate at which it increases the money supply, then
a.
unemployment and inflation rise in the short run.
b.
unemployment rises and inflation falls in the short run.
c.
unemployment falls and inflation rises in the short run.
d.
unemployment and inflation fall in the short run.
79. Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long
run
a.
the short-run Phillips curve shifts right.
b.
the short-run Phillips curve shifts left.
c.
the long-run Phillips curve shifts right.
d.
the long-run Phillips curve shifts left.
80. Which of the following played a role in depressing aggregate demand in 2001?
a.
the end of a stock-market bubble
b.
corporate accounting scandals
c.
the terrorist attacks on September 11 of that year
d.
All of the above are correct.
81. In response to the financial crisis of 2007-2008, policymakers used
a.
expansionary monetary policy and expansionary fiscal policy.
b.
expansionary monetary policy and contractionary fiscal policy.
c.
contractionary monetary policy and expansionary fiscal policy.
d.
contractionary monetary policy and contractionary fiscal policy.
82. If a central bank reduced inflation by 4 percentage points and this made output fall by 5 percent for one year and 3
percent for another year and the unemployment rate rise 2.5 percent above its natural rate for one year and 1.5 percent
above its natural rate for another year, the sacrifice ratio was
a.
1.
b.
2.
c.
3.
d.
None of the above is correct.
83. If a central bank announced that it was going to decrease inflation by 5%, people revised their inflation expectations
downward by 4%, and the central bank only lowered inflation by 1%, the short run Phillips curve would shift
a.
right and unemployment would rise.
b.
right and unemployment would fall.
c.
left and unemployment would rise.
d.
left and unemployment would fall.
84. Suppose the economy is in long-run equilibrium at an inflation rate of 1% Then inflation expectations rise to 2% and
inflation rises to 3%. The increase in expected inflation shifts the short-run Phillips curve
a.
right. Overall, unemployment moves above its natural rate.
b.
right. Overall, unemployment moves below its natural rate.
c.
left. Overall, unemployment moves above its natural rate.
d.
left. Overall, unemployment moves below its natural rate.
85. According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is
a.
higher in the short-run and the long-run.
b.
higher in the short-run only.
c.
lower in the short-run and the long-run.
d.
lower in the short-run only.
86. Which of the following both make the sacrifice ratio higher than otherwise?
a.
the Phillips curve is steep, inflation expectations adjust quickly.
b.
the Phillips curve is steep, inflation expectations adjust slowly.
c.
the Phillips curve is flat, inflation expectations adjust quickly
d.
the Phillips curve is flat, inflation expectations adjust slowly.
87. The very low inflation that the U.S. experienced in 2009 and 2010
a.
appears to have reduced expected inflation, and the short-run Phillips curve shifted downward as a result.
b.
appears to have reduced expected inflation, and the short-run Phillips curve shifted upward as a result.
c.
does not appear to have reduced expected inflation, and the short-run Phillips curve remained relatively stable
as a result.
d.
does not appear to have reduced expected inflation, but the short-run Phillips curve shifted dramatically
nevertheless.
88. A common explanation for the behavior of the short-run U.S. Phillips curve in 2009 and 2010 is that, over the
previous 20 or so years, the Federal Reserve had
a.
established a lot of credibility in its commitment to keep inflation at about 2 percent.
b.
established a lot of credibility in its commitment to keep inflation at about 5 percent.
c.
failed to establish significant credibility in its announced intent to keep inflation at about 2 percent.
d.
failed to establish significant credibility in its announced intent to keep inflation at about 5 percent.
89. Suppose the economy is currently experiencing 9% inflation per year. If the Fed wants to reduce inflation to 3% and
the sacrifice ratio is 4, then how much annual output must be sacrificed in the transition?
a.
4%
b.
8%
c.
16%
d.
24%
90. Suppose the economy is currently experiencing 6% inflation per year. If the Fed wants to reduce inflation to 2% and
the sacrifice ratio is 5, then how much annual output must be sacrificed in the transition?
a.
5%
b.
10%
c.
15%
d.
20%