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Page 1
1.
What distinction did Zimbabwe achieve in June 2008?
A)
It was the first African nation to become a democracy.
B)
It ended apartheid.
C)
It had the world's highest inflation rate.
D)
It had the world's highest unemployment rate.
2.
During hyperinflation in Germany in 1922–1923, prices rose at _____ per day.
A)
0.1%
B)
16%
C)
50%
D)
100%
3.
Workers in country A have wage contracts for cost-of-living adjustments (COLAs),
which adjust wages to offset the effect of inflation, and workers in country B do NOT.
When the central banks of countries A and B increase the money supply:
A)
prices in country A increase faster than prices in country B.
B)
prices in country B increase faster than prices in country A.
C)
prices in countries A and B will change at the same rate.
D)
COLAs have no effect on the speed of price changes.
4.
Inflation does NOT reduce purchasing power if:
A)
prices of essential products, such as food and gasoline, don't increase too much.
B)
nominal wages rise at the same rate as prices.
C)
it remains under 10% per year.
D)
the Federal Reserve increases the money supply enough to offset it.
5.
In the classical model, it is thought that the long-run:
A)
and short-run aggregate supply curves are both upward sloping.
B)
aggregate supply curve is vertical and the short-run aggregate supply curve is
upward sloping.
C)
and short-run aggregate supply curves are both vertical.
D)
aggregate supply curve is upward sloping and the short-run aggregate supply curve
is vertical.
6.
The notion that the real quantity of money is always at its long-run equilibrium level is
associated with the _____ of the price level.
A)
classical model
B)
Keynesian model
C)
monetarist model
D)
modern view
Page 2
Use the following to answer question 7:
Figure: AD–AS Model
7.
(Figure: AD–AS Model) Look at the figure AD–AS Model. Suppose the economy is at YE
with a price level of P1. Which of the following would represent the new long-run
equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2
as a result of an increase in the money supply?
A)
YE and P2
B)
YE and P1
C)
Y1 and P2
D)
YE and P3
8.
Which of the following is the BEST explanation for an upward-sloping short-run
aggregate supply curve?
A)
Prices are perfectly flexible.
B)
Wages are perfectly flexible.
C)
Wages and prices of some goods are sticky in the short run.
D)
Wages and prices of some goods are flexible in the short run but sticky in the long
run.
9.
Assume that workers and businesses are sensitized to inflation and are quick to raise
wages and prices in response to changes in the money supply. This implies that inflation
is _____ and there are _____ adjustments of wages and prices of intermediate goods.
A)
high; quick
B)
low; quick
C)
high; slow
D)
low; slow
Page 3
10.
The classical model of the price level is most likely to be a good approximation of
reality during periods of:
A)
recession.
B)
high unemployment.
C)
low inflation.
D)
high inflation.
11.
The classical model of the price level is associated with:
A)
John Maynard Keynes.
B)
economists who followed Keynes's work.
C)
economists who came before Adam Smith.
D)
economists who came after Adam Smith but before Keynes.
12.
In the short run in periods of low inflation, an increase in aggregate demand from a
position of full employment leads to:
A)
higher prices and higher unemployment.
B)
higher prices and higher output.
C)
lower prices and higher output.
D)
lower prices and higher unemployment.
13.
In the long run, an increase in aggregate demand from a position of full employment
leads to:
A)
higher prices and higher output.
B)
higher prices and the same output.
C)
higher output and lower prices.
D)
higher output and higher unemployment.
Use the following to answer questions 14-17:
Figure: Classical Model of the Price Level
Page 4
14.
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the
Price Level. If the central bank increases the money supply such that aggregate demand
shifts from AD1 to AD2, according to this classical model, real GDP will:
A)
not change.
B)
increase from YE to Y1.
C)
increase from Y1 to YE.
D)
establish a new potential output.
15.
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the
Price Level. If the central bank increases the money supply such that aggregate demand
shifts from AD1 to AD2, according to this classical model, the price level will:
A)
not change.
B)
increase from P1 to P2.
C)
increase from P1 to P3.
D)
decrease from P1 to P2.
16.
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the
Price Level. If the central bank increases the money supply such that aggregate demand
shifts from AD1 to AD2, according to this classical model, the SRAS will:
A)
not change, since in the classical model the SRAS and LRAS are both vertical at
potential output.
B)
decrease from SRAS1 to SRAS2.
C)
increase from SRAS2 to SRAS1.
D)
increase from SRAS1 to SRAS2.
17.
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the
Price Level. If the central bank increases the money supply such that aggregate demand
shifts from AD1 to AD2, according to this classical model, the equilibrium point will:
A)
not change.
B)
immediately move from E1 to E2.
C)
immediately move from E2 to E1.
D)
immediately move from E1 to E3.
18.
During periods of low inflation, the short-run aggregate supply curve is:
A)
vertical.
B)
horizontal.
C)
upward sloping.
D)
downward sloping.
Page 5
19.
During periods of high inflation, the short-run aggregate supply curve is:
A)
vertical.
B)
horizontal.
C)
upward sloping.
D)
downward sloping.
20.
In the long run, any given percentage increase in the money supply:
A)
decreases real GDP.
B)
leads to an equal percentage increase in the overall price level.
C)
increases real GDP.
D)
leads to an equal percentage decrease in the unemployment rate.
21.
If the monetary authorities decide to increase the nominal money supply by 10% when
the economy is at its full-employment level of output, in the long run the aggregate price
level increases by _____ and real GDP _____.
A)
10%; increases by 10%
B)
5%; increases by 5%, according to Okun's law
C)
10%; returns to the potential level of output
D)
5%; increases by 20%, given a marginal propensity to consume of 0.5
22.
The main difference between the classical model of the price level and the modern
understanding of the relationship between the money supply, the price level, and real
GDP is that according to classical economists, _____, while today's economists _____.
A)
money is neutral in the long run; do not consider money to be neutral in the long
run.
B)
the adjustment of prices takes some time; expect changes in the money supply to be
instantaneous.
C)
did not consider money to be neutral in the long run; consider money neutral in the
long run.
D)
the adjustment of prices to changes in the money supply is instantaneous; argue
that this adjustment process takes some time.
23.
Historical evidence has led economists to conclude that during periods of high inflation,
the _____ model of the price level is a good approximation of reality because nominal
wages and prices adjust more _____ than during periods of low inflation.
A)
classical; quickly
B)
modern; slowly
C)
classical; slowly
D)
modern; quickly
Page 6
24.
As people get used to inflation:
A)
the short-run aggregate demand curve adjusts more rapidly.
B)
wages adjust faster, and the short-run aggregate supply shifts quickly to the right.
C)
wages adjust faster, and the short-run aggregate supply shifts quickly to the left.
D)
the long-run aggregate demand adjusts more slowly.
25.
In economies with persistently high inflation, an increase in the money supply:
A)
will translate into a proportional increase in the aggregate price level much faster
than usual.
B)
will translate into a proportional increase in the aggregate price level only in the
long run.
C)
will not affect either the aggregate price level or the aggregate output.
D)
will translate into a proportional increase in the aggregate output much faster than
usual.
26.
In economies with persistently high inflation, an increase in the money supply will have:
A)
a positive effect on the real quantity of money in the long run.
B)
a negative effect on the real quantity of money, as the aggregate price level
increases by more than the money supply.
C)
a positive effect on the aggregate real output in the long run.
D)
no effect on the real quantity of money, making money neutral in the long run.
Use the following to answer questions 27-31:
Figure: AD–AS
Page 7
27.
(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy is initially at E1,
where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That
shift could be due to:
A)
an increase in the aggregate price level.
B)
a decrease in government expenditure.
C)
an increase in tax rates.
D)
an increase in money supply.
28.
(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy starts at E1 and
moves to E2, where AD2 intersects SRAS1. SRAS1 will shift to SRAS2 because:
A)
real wages rise in the long run.
B)
nominal wages rise in the long run.
C)
the real money supply rises in the long run.
D)
aggregate real output rises in the long run.
29.
(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy starts at E1 and
moves to E2, where AD2 intersects SRAS1. Finally the economy moves to E3. The
classical model of price level assumes that the economy moves from _____; thus,
inflation _____ and real GDP _____.
A)
E1 to E3, ignoring E2; increases; remains the same
B)
E2 to E3, ignoring E1; remains the same; increases
C)
E2 to E3; decreases; remains the same
D)
E1 to E2, ignoring E3; remains the same; remains the same
30.
(Figure: AD–AS) Refer to the figure AD–AS. If our economy is at equilibrium with
low-level inflation and the Fed uses expansionary monetary policy, the initial effect is
that _____ will shift to _____ and the economy will move from _____.
A)
AD1; AD2; E1 to E2
B)
SRAS1; SRAS2; E2 to E3
C)
SRAS2; SRAS1; E3 to E2
D)
AD2; AD1; E2 to E1
31.
(Figure: AD–AS) Refer to the figure AD–AS. If our economy is at equilibrium and the
Fed uses expansionary monetary policy, _____ will shift to _____ and the economy will
move from _____. Then nominal wages will _____ and _____ will shift to _____. The
economy will move from _____.
A)
AD2; AD1; E2 to E1; rise very quickly; SRAS1; SRAS2; E2 to E3
B)
SRAS1 ; SRAS2 ; E2 to E3; stay the same; AD2; AD1; E2 to E1
C)
SRAS2; SRAS1; E3 to E2; stay the same; AD2; AD1; E2 to E1
D)
AD1; AD2; E1 to E2; rise very quickly; SRAS1; SRAS2; from E2 to E3
Page 8
32.
According to the classical model of the price level, an increase in the money supply will
cause _____ and _____ increase in real GDP.
A)
inflation; no long-run
B)
inflation; a long-run
C)
no inflation; a long-run
D)
deflation; no long-run
33.
When the Treasury Department borrows from the public to finance the government's
purchases of goods and services and the Fed buys the debt back from the public in the
form of Treasury bills, it is known as:
A)
moral suasion.
B)
money illusion.
C)
structuring the deficit.
D)
monetizing the debt.
34.
The inflation tax is the effect on the public of:
A)
the higher tax paid by individuals whose incomes are indexed to inflation.
B)
the sales taxes paid during periods of inflation.
C)
the reduction in the value of money caused by inflation.
D)
the higher prices consumers pay due to inflation.
35.
If the Fed increases the monetary base by $40 billion through open-market operations:
A)
GDP will increase by $40 billion.
B)
the price level will increase by $40 billion.
C)
the U.S. government debt held by the public has been reduced by $40 billion.
D)
government spending has increased by $40 billion.
36.
The inflation tax is the effect on the public of:
A)
the increase in the real value of money caused by inflation.
B)
the decrease in the real value of money caused by inflation.
C)
the result of indexing wages to inflation.
D)
cost of living adjustments.
37.
The inflation tax is equal to:
A)
inflation multiplied by the demand for money.
B)
inflation multiplied by the nominal money supply.
C)
the money supply divided by the price level.
D)
the nominal money supply divided by inflation.
Page 9
38.
Government debt is monetized when:
A)
commercial banks buy newly issued Treasury bills.
B)
the Fed conducts open-market purchases.
C)
the Fed transfers part of its financial reserves to the Treasury, which in turn buys
Treasury bills back.
D)
the Fed sells Treasury bills in the bond market.
39.
Fiat money is:
A)
money backed by gold.
B)
money that only the government will accept to pay taxes.
C)
paper money with no intrinsic value.
D)
used only in the United States as a medium of exchange.
40.
The Fed monetizes the debt when it:
A)
prints money and buys government debt from the public.
B)
sells bonds.
C)
decreases the money supply.
D)
targets interest rates.
41.
The inflation tax is likely to be high when:
A)
there is a budget surplus.
B)
the government relies on seignorage to finance large portions of a budget deficit.
C)
the Fed decreases the money supply.
D)
corporate and personal income tax rates are increased.
42.
If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:
A)
$3.18 billion.
B)
$50 billion.
C)
$180 million.
D)
$1.8 billion.
43.
Economists call the revenue generated by the government's right to print money:
A)
seignorage.
B)
monetary policy.
C)
fiscal policy.
D)
reserve policy.
Page 10
44.
Seignorage is:
A)
the government's cost of printing and coining money.
B)
the revenue generated by the government's right to print money.
C)
the money financial institutions make selling government bonds to the Fed when
the Fed creates money.
D)
the revenue the government generates in tax receipts.
45.
Historically, governments have turned to seignorage to pay their bills when:
A)
the economy is growing.
B)
the government lacks the will to reduce the budget deficit by raising taxes or
reducing spending.
C)
the inflation rate is low.
D)
the unemployment rate is low.
46.
An inflation tax is:
A)
the reduction in purchasing power due to inflation.
B)
a tax on businesses for raising prices.
C)
a tax on people with inflated incomes.
D)
an excise tax on new automobile tires.
47.
If the public holds $300 billion in monetary purchasing power and the inflation rate is
5%, then the inflation tax that year is:
A)
$5 billion.
B)
$15 billion.
C)
$60 billion.
D)
$1,500 billion.
48.
Seignorage refers to the:
A)
problems faced by Social Security as the population ages.
B)
government's right to print money.
C)
problems senior citizens face in retirement.
D)
problems created when the government prints too much money.
49.
The inflation tax refers to:
A)
moving into higher tax brackets.
B)
the reduction in the real value of money when inflation falls.
C)
the reduction in the real value of money when inflation rises.
D)
the tax imposed on inflation by the government.
Page 11
50.
The inflation tax refers to the:
A)
increase in taxes when inflation rises.
B)
inflation rate when aggregate demand increases.
C)
inflation rate multiplied by the tax rate.
D)
inflation rate multiplied by the money supply.
51.
When a central bank prints money to pay government debts, causing rising prices that
erode the purchasing power of money held by the public, it is called a(n) _____ tax.
A)
payroll
B)
inflation
C)
currency
D)
budget
52.
Real seignorage is calculated by the:
A)
real interest rate times the money supply.
B)
rate of growth of the money supply times the real money supply.
C)
real interest rate minus the inflation rate.
D)
rate of growth of the money supply divided by the price index.
53.
If a high inflation rate leads people to _____ their money holdings, this may lead to a
further increase in the money supply and _____ inflation.
A)
reduce; lower
B)
increase; lower
C)
reduce; higher
D)
increase; higher
54.
As people try to avoid the inflation tax, the government must _____ the inflation rate to
_____.
A)
lower; avoid a budget deficit
B)
lower; raise the same revenue from inflation
C)
increase; raise the same revenue from inflation
D)
increase; avoid a budget surplus, which will harm employment
55.
A large inflation tax causes people to do all of the following EXCEPT:
A)
substitute real goods for money.
B)
substitute interest-bearing assets for money.
C)
reduce their real money holdings.
D)
sell gold.
Page 12
56.
If the money supply grows by 4% and the real money supply is $100 billion, real
seignorage is:
A)
$4 billion.
B)
$25 billion.
C)
$400 billion.
D)
$2.5 trillion.
57.
If the real money supply is $500 billion and the money supply grows by 2%, then real
seignorage is:
A)
$25 trillion.
B)
$1 trillion.
C)
$10 billion.
D)
$1 billion.
58.
From 2000 to 2008 Zimbabwe's prices:
A)
decreased by 50%.
B)
increased by 50%.
C)
increased by 100%.
D)
increased by 80 trillion percent.
59.
Zimbabwe's economic instability was caused primarily by:
A)
its joining the Coalition of the Willing in the Iraq war.
B)
its attempts to join the European Union.
C)
the government's seizure of the country's farms, which disrupted production.
D)
its high tariffs on imported goods.
60.
Politicians have an incentive to push the unemployment rate below the natural rate of
unemployment right before their reelection because:
A)
the expansionary monetary policy is used to finance the political campaigns.
B)
the political benefits are immediate and the economic costs are delayed.
C)
the Phillips curve is horizontal in the long run.
D)
the opportunistic seignorage gains are very large.
61.
If an administration pursues expansionary policy before an election to bring down
unemployment, it can:
A)
produce inflation only if the real interest rate is zero to begin with.
B)
lower people's expectations about inflation through a sense of false complacency.
C)
produce inflation if the targeted rate of unemployment is too low.
D)
produce disinflation if the expansionary monetary policy is unanticipated.
Page 13
62.
Politicians may accept moderate inflation in an election year, since the _____ in
aggregate _____ serves to _____.
A)
increase; supply; increase output
B)
decrease; supply; decrease employment
C)
decrease; demand; decrease output
D)
increase; demand; increase output
63.
Politicians may accept moderate inflation in an election year, since the _____ in
aggregate _____ serves to _____.
A)
increase; supply; decrease employment
B)
decrease; supply; increase employment
C)
decrease; demand; increase output
D)
increase; demand; increase employment
64.
When the output gap is negative, the actual unemployment rate is:
A)
above the natural rate.
B)
below the natural rate.
C)
equal to the natural rate.
D)
The actual and natural unemployment rates are not related to the output gap.
65.
Which of the following is likely to be TRUE if actual output is equal to potential
output?
A)
The actual unemployment rate is equal to the natural rate of unemployment.
B)
The actual unemployment rate is above the natural rate of unemployment.
C)
There will be zero unemployment.
D)
The natural rate of unemployment will be above the actual unemployment rate.
66.
When the output gap is _____, reflecting an inflationary gap, the unemployment rate is
_____ the natural rate of unemployment.
A)
positive; above
B)
negative; below
C)
positive; below
D)
negative; above
67.
When the actual unemployment rate is equal to the natural rate of unemployment:
A)
the unemployment rate is zero.
B)
potential output exceeds actual output.
C)
the output gap is zero.
D)
actual output exceeds potential output.
Page 14
68.
If potential output is higher than actual output, then the unemployment rate is:
A)
below the natural rate.
B)
above the natural rate.
C)
equal to the natural rate.
D)
zero.
69.
When the output gap is positive, the unemployment rate is:
A)
positive.
B)
above the natural rate.
C)
below the natural rate.
D)
negative.
Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
70.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 1982, the actual unemployment rate was
approximately:
A)
zero.
B)
4%.
C)
6%.
D)
10%.
Page 15
71.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 1982, the cyclical unemployment rate was
approximately:
A)
zero.
B)
4%.
C)
6%.
D)
10%.
72.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 1982, the natural unemployment rate (structural
plus frictional) was approximately:
A)
zero.
B)
4%.
C)
6%.
D)
10%.
73.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 2014, the actual unemployment rate was
approximately:
A)
zero.
B)
3%.
C)
5%.
D)
6%.
74.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 2014, the natural unemployment rate was
approximately:
A)
zero.
B)
3%.
C)
5.5%.
D)
9%.
75.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 2014, the amount of cyclical unemployment was
approximately:
A)
2%.
B)
0.5%
C)
9%.
D)
14%.
Page 16
76.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 2014 the output gap was:
A)
positive.
B)
negative.
C)
zero.
D)
impossible to determine without more information.
77.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and
Natural Rates of Unemployment. In 2000 the output gap was:
A)
positive.
B)
negative.
C)
zero.
D)
impossible to determine without more information.
78.
When the output gap is _____, the unemployment rate is _____ the natural rate.
A)
negative; below
B)
zero; zero
C)
inflationary; above
D)
positive; below
79.
Suppose actual aggregate output is equal to the potential output; the actual
unemployment rate is:
A)
equal to the natural rate of unemployment.
B)
higher than the natural rate of unemployment.
C)
zero.
D)
equal to the cyclical rate of unemployment.
80.
The difference between real GDP and potential GDP is known as the:
A)
price gap.
B)
unemployment gap.
C)
output gap.
D)
budget deficit.
Page 17
81.
If an economy has just had a serious recession but real GDP is expanding once again,
we can expect the unemployment rate to:
A)
fall immediately.
B)
rise immediately.
C)
rise if people who were previously discouraged enter the work force but do not find
jobs right away.
D)
fall if people who were previously discouraged enter the work force but do not find
jobs right away.
82.
The unemployment rate will fall if potential output growth is:
A)
higher than actual output growth.
B)
lower than actual output growth.
C)
equal to actual output growth.
D)
higher than the inflation rate.
83.
If actual output growth is 5% when potential output growth is 5%, then the
unemployment rate will:
A)
not change.
B)
rise.
C)
fall.
D)
be zero.
84.
Which of the following happen(s) when real GDP grows more slowly than potential
GDP?
A)
The output gap becomes more positive.
B)
The output gap and the unemployment rate both increase.
C)
The output gap and the unemployment rate both decrease.
D)
The unemployment rate rises.
85.
The idea that a 1% increase in the output gap will decrease the unemployment rate by
0.5% is known as _____ law.
A)
Okun's
B)
Phillips's
C)
Greenspan's
D)
Keynes's
Page 18
86.
The relationship between the output gap and cyclical unemployment is expressed by:
A)
the real business cycle theory.
B)
the Taylor rule.
C)
the natural rate hypothesis.
D)
Okun's law.
87.
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:
A)
4%.
B)
5%.
C)
6.5%.
D)
9%.
88.
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.
A)
3% increase
B)
2% increase
C)
1% increase
D)
3% decrease
89.
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?
A)
a reduction in the number of discouraged workers
B)
an increase in the number of discouraged workers
C)
an increase in the level of employment
D)
a decrease in the level of employment
90.
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:
A)
3.5%.
B)
3%.
C)
2.5%.
D)
1.5%.
Page 19
91.
Okun's law suggests that a _____ increase in a positive output gap _____ the
unemployment rate by _____.
A)
1%; increases; 0.5%
B)
1%; decreases; 0.5%
C)
0.5% ; increases; 1%
D)
0.5%; decreases; 1%
92.
Okun's law is less than a 1:1 ratio because some:
A)
employers quickly lay off workers.
B)
employers change the working hours of current employees as demand changes.
C)
employees act to job share.
D)
workers are not counted as unemployed when they are actively seeking work.
93.
If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:
A)
disinflation is likely.
B)
it will not affect prices.
C)
inflation will increase.
D)
the short-run Phillips curve will shift down.
94.
A supply shock caused by an increase in the price of gasoline causes a(n) _____ in
output and a(n) _____ in prices.
A)
decrease; decrease
B)
decrease; increase
C)
increase; increase
D)
increase; decrease
95.
According to the short-run Phillips curve, when actual real GDP is _____ potential
output, the price level _____ and the unemployment rate falls.
A)
below; increases
B)
above; decreases
C)
below; decreases
D)
above; increases
96.
The short-run Phillips curve shows:
A)
a direct relationship between unemployment and inflation.
B)
an inverse relationship between unemployment and inflation.
C)
consequences of the misperceptions theory.
D)
the optimal level of employment.
Page 20
97.
The short-run Phillips curve represents the relationship between the unemployment rate
and the rate of change in:
A)
the interest rate.
B)
output.
C)
wages only.
D)
the aggregate price level.
98.
A supply shock:
A)
moves our economy along the short-run aggregate supply curve.
B)
moves us along the short-run Phillips curve.
C)
shifts the short-run Phillips curve.
D)
shifts the short-run aggregate supply curve but not the short-run Phillips curve.
99.
In 1958, _____ came up with a theory regarding the trade-off between unemployment
and inflation.
A)
A. W. H. Phillips
B)
John Maynard Keynes
C)
Joseph Schumpeter
D)
Milton Friedman
100.
_____ depicts a trade-off between unemployment and inflation.
A)
The Phillips curve
B)
Keynes's law
C)
The multiplier
D)
The Friedman curve
101.
The notion that there is a trade-off between inflation and unemployment is expressed as
a _____ curve.
A)
Phillips
B)
Keynes
C)
Schumpeter
D)
Friedman
102.
A Phillips curve implies a negative relationship between:
A)
consumption and saving.
B)
inflation and prices.
C)
inflation and unemployment.
D)
consumption and inflation.
Page 21
103.
Each point on a Phillips curve is a different combination of:
A)
price and quantity.
B)
inflation and unemployment.
C)
the interest rate and investment.
D)
saving and disposable income.
104.
Along a Phillips curve:
A)
consumption depends on prices.
B)
the inflation rate varies inversely with the unemployment rate.
C)
the inflation rate varies directly with the unemployment rate.
D)
prices and tax rates are directly related.
105.
Suppose that the unemployment rate rises as the inflation rate declines. This situation is
consistent with a movement along the _____ Phillips curve.
A)
vertical
B)
horizontal
C)
positively sloped
D)
negatively sloped
106.
The short-run Phillips curve:
A)
is upward sloping because inflation and unemployment rates have a positive
relationship in the short run.
B)
is vertical because there is no trade-off between inflation and unemployment rates
in the short run.
C)
is downward sloping because there is a trade-off between inflation and
unemployment rates in the short run.
D)
is horizontal because there is no trade-off between inflation and unemployment
rates in the short run.
107.
Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve
will:
A)
shift down.
B)
show a movement along the same curve.
C)
not be affected at all.
D)
shift up.
Page 22
108.
The negative relationship between the inflation rate and the unemployment rate is
known as the:
A)
short-run Phillips curve.
B)
short-run aggregate supply curve.
C)
long-run Phillips curve.
D)
aggregate demand curve.
109.
If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the
_____.
A)
AD; right
B)
AD; left
C)
SRAS; right
D)
SRAS; left
110.
If the short-run Phillips curve has shifted downward, the _____ curve has shifted to the
_____.
A)
SRAS; left
B)
SRAS; right
C)
AD; left
D)
AD; right
111.
If there has been a downward movement along the fixed short-run Phillips curve, the
_____ curve has shifted to the _____.
A)
AD; left
B)
AD; right
C)
SRAS; left
D)
SRAS; right
112.
If there has been an upward movement along the fixed short-run Phillips curve, the
_____ curve has shifted to the _____.
A)
SRAS; left
B)
SRAS; right
C)
AD; left
D)
AD; right
Page 23
Use the following to answer questions 113-115:
Figure: AD–AS Model and the Short-Run Phillips Curve
113.
(Figure: AD–AS Model and the Short-Run Phillips Curve) Look at the figure AD–AS
Model and the Short-Run Phillips Curve. If the central bank increases the money supply
so that aggregate demand shifts from AD1 to AD2, then real GDP will increase by:
A)
zero.
B)
2%.
C)
4%.
D)
6%.
114.
(Figure: AD–AS Model and the Short-Run Phillips Curve) Look at AD–AS Model and
the Short-Run Phillips Curve. If the central bank decreases the money supply so that
aggregate demand shifts from AD2 to AD1, then the unemployment rate will be:
A)
zero.
B)
2%.
C)
4%.
D)
6%.
Page 24
115.
(Figure: AD–AS Model and the Short-Run Phillips Curve) Look at AD–AS Model and
the Short-Run Phillips Curve. If the central bank increases the money supply so that
aggregate demand shifts from AD1 to AD2, then the inflation rate will be:
A)
zero.
B)
2%.
C)
4%.
D)
6%.
116.
An increase in the expected rate of inflation:
A)
shifts the short-run Phillips curve down.
B)
shifts the short-run Phillips curve up.
C)
moves the economy along the short-run Phillips curve to higher rates of inflation.
D)
moves the economy along the short-run Phillips curve to higher rates on
unemployment.
117.
If workers expect a lower rate of inflation, the short-run Phillips curve will:
A)
remain constant, but there will be a movement down the curve.
B)
be unaffected.
C)
shift up.
D)
shift down.
118.
Expectations of a higher inflation rate shift the short-run aggregate supply curve to the
_____, changing the trade-off between inflation and unemployment. As a result, the
short-run Phillips curve shifts _____.
A)
left; down
B)
right; up
C)
left; up
D)
right; down
Page 25
Use the following to answer questions 119-122:
Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve
with an expected inflation rate of 2%.
119.
(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure
Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an
unemployment rate of 6%, no inflation, and no expectation of inflation. If the central
bank increases the money supply such that aggregate demand shifts to the right and
unemployment falls to 4%, then inflation will:
A)
fall to –2%.
B)
not change.
C)
rise to 2%.
D)
rise to 4%.
120.
(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure
Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has
an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central
bank decreases the money supply such that aggregate demand shifts to the left and
unemployment rises to 8%, then inflation will:
A)
fall to –2%.
B)
not change.
C)
rise to 2%.
D)
rise to 4%.
Page 26
121.
(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure
Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an
unemployment rate of 6%, inflation of 2%, and an expectation of 2% inflation. If the
central bank increases the money supply such that aggregate demand shifts to the right
and unemployment falls to 4%, then inflation will:
A)
fall to –2%.
B)
not change.
C)
rise to 2%.
D)
rise to 4%.
122.
(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure
Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has
an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation.
If the central bank decreases the money supply such that aggregate demand shifts to the
left and unemployment rises to 8%, then inflation will:
A)
fall to zero.
B)
not change.
C)
rise to 2%.
D)
rise to 4%.
123.
Suppose that commodity prices across the economy begin to fall and consumers and
firms begin to expect a lower rate of inflation. The SRAS curve will shift to the _____,
and the short-run Phillips curve will shift _____.
A)
left; downward
B)
right; downward
C)
left; upward
D)
right; upward
124.
An increase in expected inflation will affect the short-run Phillips curve:
A)
by shifting it downward; the actual rate of inflation at any given unemployment
rate will fall by the same amount.
B)
by shifting it upward; the actual rate of inflation at any given unemployment rate
will also be higher when the expected inflation rate is higher.
C)
by moving along the same curve, where it equals the actual rate of inflation.
D)
only if the economy is at the nonaccelerating inflation rate of unemployment.
Page 27
125.
The long-run Phillips curve is:
A)
the same as the short-run Phillips curve.
B)
negatively sloped, showing an inverse relationship between unemployment and
inflation.
C)
vertical at the nonaccelerating inflation rate of unemployment (NAIRU).
D)
unrelated to the NAIRU.
126.
Which of the following accurately portrays the shape of the long-run Phillips curve?
A)
a horizontal curve
B)
a vertical curve
C)
an upward-sloping curve
D)
a downward-sloping curve
127.
A long-run Phillips curve has a(n) _____ slope because _____.
A)
negative; there is a positive relationship between the output gap and the
nonaccelerating inflation rate of unemployment (NAIRU)
B)
infinite; any unemployment rate below the NAIRU leads to ever-accelerating
inflation
C)
zero; there is a positive relationship between expected inflation and unemployment
D)
positive; any unemployment rate above the NAIRU leads to ever-accelerating
inflation
128.
As a consequence of the existence of a nonaccelerating inflation rate of unemployment:
A)
cyclical unemployment can never be zero.
B)
there is no short-run trade-off between unemployment and inflation.
C)
money is neutral.
D)
there is no long-run trade-off between unemployment and inflation.
129.
If the natural rate of unemployment _____, the nonaccelerating inflation rate of
unemployment _____, and the long-run Phillips curve shifts to the left.
A)
falls; falls
B)
rises; rises
C)
falls; rises
D)
rises; falls
Page 28
130.
When workers and firms become aware of a rise in the general price level:
A)
they will not do anything, because they know they are powerless to counter any
economic changes.
B)
they will incorporate higher prices into their expectations.
C)
firms with sticky prices will ultimately adjust their prices downward.
D)
they will agree to renegotiate wage contracts downward.
131.
In the long run, when the actual inflation rate gets embedded in people's expectation:
A)
the trade-off between inflation and unemployment becomes even stronger.
B)
it is possible to achieve lower unemployment in the long run by accepting higher
inflation.
C)
there is no longer a trade-off between inflation and unemployment.
D)
actual inflation at any unemployment rate is always higher than expected inflation.
132.
The NAIRU is:
A)
the inflation rate at which the unemployment rate does not change over time.
B)
a trade-off between unemployment and inflation.
C)
the unemployment rate at which inflation does not change over time.
D)
a rate at which it is possible to achieve lower unemployment by accepting higher
inflation.
133.
The long-run Phillips curve shows the relationship between:
A)
potential aggregate output and the natural rate of unemployment at a given rate of
expected inflation.
B)
expected inflation and actual inflation after the expectation becomes embedded in
people's minds.
C)
the aggregate output and the aggregate price level at a given rate of expected
inflation.
D)
unemployment and inflation after expectations of inflation have had time to adjust
to experience.
134.
The long-run Phillips curve is:
A)
vertical at an unemployment rate equal to the nonaccelerating inflation rate of
unemployment (NAIRU).
B)
horizontal at inflation rate equal to NAIRU.
C)
upward sloping, showing that there is no trade-off between unemployment and
inflation.
D)
downward sloping, showing that there is a trade-off between unemployment and
inflation.
Page 29
135.
The long-run Phillips curve is vertical at the nonaccelerating inflation rate of
unemployment (NAIRU) because an unemployment rate _____ the NAIRU will lead to
_____ inflation.
A)
below; ever-accelerating
B)
equal to; zero
C)
above; ever-accelerating
D)
below; ever-decelerating
Use the following to answer question 136:
136.
(Table: Combinations of Unemployment and Inflation) Look at the table Combinations
of Unemployment and Inflation. Which of the following combinations could lie on the
same long-run Phillips curve?
A)
W and Z
B)
W and Y
C)
X and Z
D)
X and Y
137.
To avoid accelerating inflation over time, a government's policy should _____ to trade
off lower unemployment for higher inflation rather than _____.
A)
try; accept a lower unemployment rate so that the actual inflation rate is less than
the expected inflation rate
B)
not try; accept a high enough unemployment rate so that the actual inflation rate
matches the expected inflation rate
C)
try; accept a higher unemployment rate so that the actual inflation rate is higher
than the expected inflation rate
D)
not try; try to control inflation only by using aggressive disinflationary polices
138.
Which of the following accurately describes disinflation?
A)
It must be accompanied by a decline in the price level.
B)
The inflation rate rises at a higher rate.
C)
It is reduction of the inflation that has become embedded in expectations.
D)
It is a gradual reduction in the price level over time.
Page 30
139.
To bring disinflation to an economy, policy makers must:
A)
slow down labor productivity growth.
B)
increase the money supply to release the economy from the liquidity trap.
C)
keep unemployment below its natural rate for an extended period.
D)
lower expectations about inflation.
140.
If the Fed reduces the inflation rate from 5% to 3%, it is:
A)
following a policy rule.
B)
engaging in disinflation.
C)
increasing employment.
D)
raising economic growth.
141.
Disinflation means a decrease in:
A)
prices.
B)
the rate of inflation.
C)
aggregate supply.
D)
the money supply.
142.
The cost of disinflation is the:
A)
leftward shift in aggregate supply.
B)
decrease in prices.
C)
loss of real GDP in the process.
D)
loss of international markets when prices change.
143.
Disinflation is costly to the economy if _____ is forced on the economy, _____, and
_____.
A)
deflation; employment decreases; aggregate output falls
B)
increasing inflation; unemployment decreases; aggregate price level increases
C)
stagflation; unemployment increases; inflation increases
D)
a recession; unemployment increases; aggregate output falls
144.
Reduction of inflation that is embedded in expectations is called:
A)
disinflation.
B)
deflation.
C)
hyperinflation.
D)
the natural rate of inflation.
Page 31
145.
Core inflation EXCLUDES the price of:
A)
new cars.
B)
luxury items, such as fur coats.
C)
houses.
D)
energy and food.
146.
Analysis of the Phillips curve reveals that a _____ in unemployment, like that of the
early 1980s, is needed to break the cycle of inflationary expectations.
A)
permanent increase
B)
permanent decrease
C)
temporary increase
D)
temporary decrease
Use the following to answer question 147:
Figure: The Great Disinflation
147.
(Figure: The Great Disinflation) Look at the figure The Great Disinflation. In the early
1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary
policy. In the short run this policy led to a _____ level of actual output and a _____ rate
of unemployment.
A)
high; high
B)
low; high
C)
low; low
D)
high; low
Page 32
148.
The U.S. government reports a core inflation rate that EXCLUDES _____ and _____
prices to remove the volatility of those two sectors from inflation estimates.
A)
housing; automobile
B)
steel; housing
C)
energy; food
D)
gasoline; housing
149.
The measure used by the Fed that excludes food and energy prices is the:
A)
consumer price index.
B)
wholesale price index.
C)
core inflation rate.
D)
federal funds rate.
150.
The measure that the Fed regards as the best guide to underlying inflation is the:
A)
consumer price index.
B)
wholesale price index.
C)
core inflation rate.
D)
federal funds rate.
151.
Deflation:
A)
hurts borrowers and helps lenders.
B)
helps borrowers and hurts lenders.
C)
unlike inflation, affects neither borrowers nor lenders.
D)
has effects on borrowers and lenders that depend on the amount of the loan.
152.
Deflation:
A)
can cause increases in output.
B)
can cause budget surpluses.
C)
can cause decreases in output.
D)
will not affect output.
153.
The problem of debt deflation deepens during an economic slump because:
A)
borrowers have to reduce spending to pay off debts.
B)
the Fisher effect raises the nominal interest rate during deflation.
C)
lenders have to reduce spending to accommodate higher returns from loans.
D)
the zero bound on the nominal interest rate is broken.
Page 33
154.
Debt deflation is the _____ in aggregate _____ caused by deflation.
A)
increase; supply
B)
reduction; supply
C)
increase; demand
D)
reduction; demand
155.
In debt deflation, deflation raises the cost of existing debt by increasing the value of
money needed to pay it off, leading to a(n) _____ in aggregate _____.
A)
increase; supply
B)
reduction; supply
C)
increase; demand
D)
reduction; demand
156.
Irving Fisher described debt deflation as:
A)
increasing aggregate demand and improving the economic downturn, leading to
less deflation.
B)
reducing aggregate demand and worsening the economic downturn, leading to
further deflation.
C)
reducing the debt obligation of borrowers as they become better off under
deflation.
D)
hurting lenders by reducing the value of their loans and lowering the interest rate
on loan.
157.
Irving Fisher argued that deflation is MOST likely to:
A)
expand the economy because the cost of goods has fallen.
B)
increase aggregate supply.
C)
increase aggregate demand.
D)
decrease aggregate demand.
158.
Who gains when there is unexpected deflation?
A)
real-asset owners
B)
borrowers
C)
lenders
D)
real-asset owners, borrowers, and lenders
159.
Who loses when there is unexpected deflation?
A)
nominal-asset holders
B)
borrowers
C)
lenders
D)
nominal-asset holders, borrowers, and lenders
Page 34
160.
Deflation leads to winners and losers; for example:
A)
mortgage holders lose, but banks awaiting mortgage payments benefit.
B)
landlords lose, but people paying rent gain.
C)
savings account holders lose, but the banks gain.
D)
bond and stock holders lose, but the brokerage company gains.
161.
During periods of deflation _____ will be hurt and _____ will be helped.
A)
firms; borrowers
B)
borrowers; lenders
C)
consumers; firms
D)
home buyers; home sellers
162.
When economists state that there is a zero bound on nominal interest rates, they mean
that:
A)
the real interest rate cannot go below zero.
B)
the nominal interest rate cannot go below zero.
C)
the real interest rate can very well be negative.
D)
the nominal interest rate can always go below zero.
163.
Inability to use monetary policy because the nominal rate of interest cannot fall below
zero is called:
A)
liquidity preference.
B)
money neutrality.
C)
the liquidity trap.
D)
money illusion.
164.
If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is
_____.
A)
effective; effective
B)
ineffective; ineffective
C)
effective; ineffective
D)
ineffective; effective
165.
There is a zero bound to:
A)
the real money supply.
B)
nominal interest rates.
C)
potential output.
D)
real money demand.
Page 35
166.
Liquidity traps are most likely to occur when the:
A)
economy is going through a recovery.
B)
economy is expanding rapidly.
C)
public expects inflation.
D)
public expects deflation.
167.
Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month
certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is
_____, it can be argued that _____ is (are) worse off.
A)
above 3%; the bank issuing the certificate
B)
exactly 6%; both the bank and Tony
C)
below 3%; Tony
D)
below 3%; the bank issuing the certificate
168.
Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds
yielding a fixed 5% interest rate over a year. If the actual inflation rate is _____, it can
be argued that _____ is (are) better off.
A)
below 3%; Adrianna
B)
exactly 5%; both the bond issuer and Adrianna
C)
above 3%; Adrianna
D)
below 3%; the bond issuer
169.
In a liquidity trap:
A)
using expansionary monetary policy is not effective because the real interest rate is
negative.
B)
aggregate demand falls because consumers do not have enough liquidity to
consume.
C)
using expansionary monetary policy is not effective because the nominal interest
rate is irreducible.
D)
lenders are trapped by large loans with declining rates of return.
170.
A liquidity trap results from:
A)
the inflation tax.
B)
expansionary fiscal policy.
C)
the Fisher effect.
D)
the zero bound of the nominal interest rate.
Page 36
171.
If there is too much deflation:
A)
people will switch from money to real assets.
B)
the nominal interest rate will be constrained by the zero interest rate bound.
C)
lenders will be harmed.
D)
aggregate demand will increase.
172.
The liquidity trap is associated with all of the following EXCEPT:
A)
a large reduction in the demand for loanable funds.
B)
the nominal interest rate falling to zero.
C)
monetary policy becoming ineffective.
D)
fiscal policy becoming ineffective.
173.
To avoid falling into a liquidity trap, most central banks:
A)
seek a positive but small inflation rate rather than zero inflation.
B)
target inflation rather than the money supply.
C)
conduct open-market operations to change the money supply instead of changing
the discount rate.
D)
aim at a target of zero inflation so that inflation expectations are zero too.
174.
When Fed officials worried about the possibility of “Japanification” in the United
States, it meant that they were worried that the U.S. economy would:
A)
grow faster than the economy of Japan after World War II.
B)
accumulate large trade surpluses, like Japan.
C)
fall into a period of hyperinflation.
D)
fall into a deflationary trap.
Page 37
Use the following to answer questions 175-178:
Figure: Short-Run Phillips Curve
175.
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC2
is based on an expected inflation rate of:
A)
zero.
B)
1%.
C)
2%.
D)
5%.
176.
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC1
is based on an expected inflation rate of:
A)
zero.
B)
1%.
C)
2%.
D)
3%.
177.
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The
natural rate of unemployment is:
A)
3%.
B)
5%.
C)
7%.
D)
8%.
Page 38
178.
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The
NAIRU is:
A)
3%.
B)
5%.
C)
7%.
D)
8%.
179.
Suppose the economy is in long-run equilibrium. The government has just decided to
lower income taxes. The long-run impact of this policy will be _____ in the natural rate
of unemployment and _____ in inflation.
A)
a decrease; an increase
B)
a decrease; no change
C)
no change; an increase
D)
no change; no change
180.
The worst inflation in the United States in modern times occurred in the late 1970s,
when prices were increasing at an annual rate of 13%.
A)
True
B)
False
181.
In June 2008 Zimbabwe had the world's highest unemployment rate.
A)
True
B)
False
182.
In the classical model of the price level, there is NO distinction between the short run
and the long run.
A)
True
B)
False
183.
The short-run aggregate supply curve is positively sloped because wages and prices are
not all completely flexible.
A)
True
B)
False
184.
The classical model of the price level is more accurate during low inflation than high
inflation.
A)
True
B)
False
Page 39
185.
An inflation tax is the effect on the public of a reduction in the value of money caused
by inflation.
A)
True
B)
False
186.
An inflation rate of 5% will increase the purchasing power of $1 to $1.10.
A)
True
B)
False
187.
It is impossible for the U.S. government to raise revenue by printing more money
because the Federal Reserve, not the Treasury, issues most of the U.S. money supply.
A)
True
B)
False
188.
People can avoid the inflation tax by reducing their real money balances.
A)
True
B)
False
189.
A high inflation rate leads people to increase their money holdings, leading to more
money printing and higher inflation.
A)
True
B)
False
190.
Hyperinflation is often a result of a government trying to pay for its spending by using
the inflation tax.
A)
True
B)
False
191.
Zimbabwe's inflation problems arose mainly when its president, Robert Mugabe, seized
the farmland of the white minority and turned it over to his supporters, which disrupted
production and undermined the country's tax base.
A)
True
B)
False
192.
To balance its budget, the government of Zimbabwe borrowed large amounts of money
in world markets.
A)
True
B)
False
Page 40
193.
Policies that expand output and decrease unemployment are popular with voters but are
likely to cause inflation later.
A)
True
B)
False
194.
Policies that reduce inflation are popular with voters because they lead to higher output
and lower unemployment.
A)
True
B)
False
195.
When real output growth is above potential output growth, the output gap is positive and
the unemployment rate is below the natural rate.
A)
True
B)
False
196.
The difference between the growth rate of actual and potential GDP is the output gap.
A)
True
B)
False
197.
If potential GDP is growing at 3% and actual GDP is growing at 2%, then the
unemployment rate is below the natural rate.
A)
True
B)
False
198.
According to Okun's law, unemployment must decrease by 1% for output to increase by
1%.
A)
True
B)
False
199.
In the short run, a lower unemployment rate may be achieved at the cost of a higher
inflation rate.
A)
True
B)
False
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200.
In the long run, there is a negative relationship between the inflation rate and the
unemployment rate.
A)
True
B)
False
201.
In the long run, the unemployment rate will equal the natural rate of unemployment at
any price level.
A)
True
B)
False
202.
Explain why the classical model of the price level is more accurate during high inflation
than low inflation.
203.
The central bank of a government can print more money to pay for government deficits.
Why do some refer to this practice as imposing an inflation tax?
204.
Explain the political asymmetry associated with policies that can cause or cure inflation.
205.
Explain how the output gap is related to the unemployment rate and the natural
unemployment rate.
206.
Suppose that the natural rate of unemployment is 5% and that the economy is operating
at 97.5% of potential output. Use Okun's law to determine the unemployment rate.
207.
Suppose that the natural rate of unemployment is 5% and that the economy is operating
at 101% of potential output. Use Okun's law to determine the unemployment rate.
208.
Suppose that you live in a city whose economic growth has been declining for several
months. Oddly, the official unemployment rate in your city has not begun to rise. How
can you explain this?
209.
The short-run Phillips curve is believed to be downward sloping with the inflation rate
on the vertical axis and the unemployment rate on the horizontal axis. Can this curve
extend below the horizontal axis? Can it extend to the left of the vertical axis? Explain.
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210.
Explain why, in the short run, the unemployment rate tends to fall when the inflation
rate rises.
211.
Suppose that the public expects inflation to increase from 3% to 4% this year. How will
this affect the short-run Phillips curve?
212.
Why is the long-run Phillips curve believed to be vertical at the natural rate of
unemployment, or NAIRU?
213.
Suppose the economy is significantly weakened, real GDP is far below potential GDP,
and the unemployment rate is high. The Federal Reserve is concerned that monetary
policy might have limited effectiveness because of deflation. How can deflation limit
the Fed's ability to increase aggregate demand?
214.
In June 2008 _____ had the world's highest inflation rate, _____ Germany's rate in
1922–1923.
A)
Zimbabwe; equal to
B)
Zimbabwe; even higher than
C)
the Republic of Congo; equal to
D)
the Republic of Congo; less than
215.
In the long run, an increase in the money supply:
A)
will increase real GDP and the price level.
B)
causes people to hold onto large sums of money.
C)
results in no change in real GDP.
D)
encourages people to save more money.
216.
The classical model of the price level:
A)
holds that the short run is distinct from the long run.
B)
holds that the economy is always producing at some point on the LRAS.
C)
works best when an economy has low levels of inflation.
D)
does not consider the effects of the real quantity of money.
217.
When an economy has high inflation:
A)
wage and price stickiness lessens or disappears.
B)
the Keynesian model of the economy is most relevant.
C)
wages become more inflexible as workers wait for prices to stabilize.
D)
changes in the money supply take much longer to affect the inflation rate.
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218.
If a central bank pursues an expansionary monetary policy:
A)
the aggregate price level and level of real GDP will increase in the short run.
B)
the level of real GDP will increase, but the aggregate price level will stay the same
in the long run.
C)
nominal prices and nominal wages will be unaffected in the long run.
D)
the aggregate price level will increase and the level of real GDP will decrease in
the short run.
219.
The debt is monetized when:
A)
the budget is approved by Congress.
B)
the Fed buys back debt via open-market purchases.
C)
the government raises taxes.
D)
transfer payments are decreased.
220.
Government's right to print money to finance deficits is referred to as:
A)
open-market sales.
B)
seignorage.
C)
fiat money implementation.
D)
crowding out.
221.
Borrowers benefit:
A)
when government engages in seignorage.
B)
when unexpected inflation is low.
C)
when the Fed engages in continual open-market sales.
D)
when real GDP falls as a result of a decrease in AD.
222.
A government with a large deficit will also produce high inflation in the economy if it:
A)
raises taxes.
B)
reduces government spending.
C)
finances the deficit via seignorage.
D)
imposes a debt ceiling.
223.
When inflation is high:
A)
people will increase their level of real-money holdings.
B)
people will save more.
C)
lenders gain at the expense of borrowers.
D)
people will decrease their level of real-money holdings.
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224.
If government decides to print money to finance a deficit:
A)
people who hold money will be penalized as inflation increases.
B)
borrowers will be penalized because they will owe more as inflation increases.
C)
real GDP will decrease in the long run.
D)
the Fed must sell bonds in the open market.
225.
During an inflationary gap:
A)
the unemployment rate is less than the natural rate of unemployment.
B)
actual output is less than potential output.
C)
the unemployment rate is equal to the natural rate of unemployment.
D)
wages and prices must fall to restore the economy to its potential output.
226.
A negative output gap is associated with a(n) _____ unemployment rate.
A)
unusually low
B)
natural
C)
unusually high
D)
unchanged
227.
A negative output gap implies an unemployment rate:
A)
above the natural rate.
B)
below the natural rate.
C)
equal to the natural rate.
D)
that equals the frictional and structural amounts of unemployment.
228.
As a result of a downturn in the economy, a firm cuts back on workers' hours but does
not fire workers. Following Okun's law, this is one reason:
A)
the relationship between the output gap and the unemployment rate is positive.
B)
the relationship between the output gap and the unemployment is negative and less
than a one-to-one relationship.
C)
a negative output gap is associated with an unusually low unemployment rate.
D)
a positive output gap is associated with an unusually high unemployment rate.
229.
Okun's law finds that output gaps and unemployment rates are _____ related in a _____
ratio.
A)
positively; one-to-one
B)
negatively; less than one-to-one
C)
positively; less than one-to-one
D)
negatively; one-to-one
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230.
Which of the following could lead to moderate inflation?
A)
a negative supply shock
B)
a drop in consumer confidence
C)
a contractionary fiscal policy
D)
the pursuit of a balanced budget during an expansion
231.
Suppose an economy's aggregate price level increases and its aggregate level of real
GDP decreases. This could arise from a _____ shock.
A)
positive demand
B)
negative supply
C)
positive supply
D)
negative demand
232.
An economy's short-run Phillips curve will shift up in response to:
A)
a change in the inflation rate.
B)
an increase in the unemployment rate.
C)
an increase in expected inflation.
D)
a contractionary fiscal policy.
233.
The short-run Phillips curve:
A)
depicts the positive relationship between the unemployment rate and the inflation
rate.
B)
broke down in the 1970s because of a supply shock.
C)
illustrates that expected inflation has little effect on the natural rate of
unemployment.
D)
shows that policies may not be able to change the natural rate of unemployment.
234.
The MOST important factors affecting the rate of inflation are:
A)
expected inflation and the real growth rate.
B)
the unemployment rate and expected inflation.
C)
the real growth rate and the unemployment rate.
D)
fiscal policy effects and the presence of liquidity traps.
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235.
The long-run Phillips curve:
A)
depicts the negative relationship between the unemployment rate and the inflation
rate.
B)
suggests that policies have little effect on the natural rate of unemployment in the
long run.
C)
explains how expansionary policies can affect an economy, while contractionary
policies have little effect.
D)
shows the positive relationship between the unemployment rate and the inflation
rate.
236.
The long-run Phillips curve shows that:
A)
there is a trade-off between unemployment and inflation.
B)
an expansionary policy could lead to lower unemployment temporarily.
C)
the natural rate of unemployment occurs when the actual inflation rate equals the
expected inflation rate.
D)
lower unemployment can be sustained indefinitely with continuous expansionary
policies.
237.
Disinflation:
A)
entails eliminating inflation in an economy.
B)
policy is likely to plunge the economy into a major recession.
C)
occurs as a result of policy makers' attempts to correct a major recession.
D)
results in a fall in the unemployment rate.
238.
When an economy has debt deflation:
A)
aggregate demand increases, since the real debt burden is reduced.
B)
aggregate demand is not affected, since real variables are not affected.
C)
aggregate demand decreases as borrowers' real debts increase, which leads to less
spending.
D)
the economy moves quickly to its potential output.
239.
During a liquidity trap:
A)
monetary policy is ineffective, since nominal interest rates cannot fall below zero.
B)
the money market is in disequilibrium.
C)
the only tool that the Federal Reserve finds effective is expansionary monetary
policy.
D)
nominal interest rates will rise regardless of what policy the Federal Reserve
pursues.
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240.
If an economy finds itself in a liquidity trap:
A)
consumers are trapped by an abundance of liquidity and are spending abundantly.
B)
the economy is trapped by the inability of monetary policy to reduce nominal
interest rates further.
C)
money markets are trapped in a state of continuous disequilibrium.
D)
monetary authorities cannot stop nominal interest rates from rising.
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Answer Key
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