The Short-Run Trade-off between Inflation and Unemployment 8645
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.
8646 The Short-Run Trade-off between Inflation and Unemployment
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
The Short-Run Trade-off between Inflation and Unemployment 8647
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.
8648 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8649
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.
8650 The Short-Run Trade-off between Inflation and Unemployment
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%.
The Short-Run Trade-off between Inflation and Unemployment 8651
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.
8652 The Short-Run Trade-off between Inflation and Unemployment
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%
The Short-Run Trade-off between Inflation and Unemployment 8653
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.
8654 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8655
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.
8656 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8657
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.
8658 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8659
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.
8660 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8661
True/False and Short Answer
1. In the long run, the natural rate of unemployment depends primarily on the growth rate of the
money supply.
a. True
b. False
2. In the long run, the inflation rate depends primarily on the growth rate of the money supply.
a. True
b. False
3. Short-run outcomes in the economy can be expressed in terms of output and the price level, or in
terms of unemployment and inflation.
a. True
b. False
8662 The Short-Run Trade-off between Inflation and Unemployment
4. Other things the same, an increase in aggregate demand reduces unemployment and raises inflation
in the short run.
a. True
b. False
5. Other things the same, a decrease in aggregate demand decreases both inflation and
unemployment.
a. True
b. False
6. A given short-run Phillips curve shows that an increase in the inflation rate will be accompanied by
a lower unemployment rate in the short run.
a. True
b. False
The Short-Run Trade-off between Inflation and Unemployment 8663
7. The short–run Phillips curve is based on the classical dichotomy.
a. True
b. False
8. The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the
unemployment rate above its natural rate.
a. True
b. False
9. The logic behind the tradeoff between inflation and unemployment is that high aggregate demand
puts upward pressure on wages and prices while raising output.
a. True
b. False
8664 The Short-Run Trade-off between Inflation and Unemployment
10. Fiscal policy cannot be used to move the economy along the short-run Phillips curve.
a. True
b. False
11. If the Fed were to increase the money supply, inflation would increase and unemployment would
decrease in the short run.
a. True
b. False
12. Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible
economic outcomes.
a. True
b. False