The Short-Run Trade-off between Inflation and Unemployment 8605
33. A favorable supply shock will cause
a. unemployment to rise and the short–run Phillips curve to shift right.
b. unemployment to rise and the short-run Phillips curve to shift left.
c. unemployment to fall and the short-run Phillips curve to shift right.
d. unemployment to fall and the short–run Phillips curve to shift left.
34. A favorable supply shock will cause inflation to
a. rise and shift the short–run Phillips curve right.
b. rise and shift the short-run Phillips curve left.
c. fall and shift the short-run Phillips curve right.
d. fall and shift the short–run Phillips curve left.
35. Which of the following is correct if there is a favorable supply shock?
a. the short-run aggregate supply curve and the short-run Phillips curve both shift right.
b. the short-run aggregate supply curve and the short-run Phillips curve both shift left.
c. the short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
d. the short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.
8606 The Short-Run Trade-off between Inflation and Unemployment
36. Suppose that a small economy that produces mostly agricultural goods experiences a year with
exceptionally good conditions for growing crops. The good weather would
a. shift both the short-run aggregate supply and the short-run Phillips curve right.
b. shift both the short-run aggregate supply and the short-run Phillips curve left.
c. shift the short-run aggregate supply curve to the right, and the short-run Phillips curve to the
left.
d. shift the short-run aggregate supply curve to the left, and the short-run Phillips curve to the
right.
37. Which of the following would cause the price level to rise and output to fall in the short run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock
The Short-Run Trade-off between Inflation and Unemployment 8607
38. Which of the following would cause the price level to fall and output to rise in the short run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock
39. The large increase in oil prices in the 1970s was caused primarily by a(n)
a. increase in demand for oil.
b. decrease in demand for oil.
c. decrease in the supply of oil.
d. increase in the supply of oil.
8608 The Short-Run Trade-off between Inflation and Unemployment
40. In the United States during the 1970s, expected inflation
a. rose substantially.
b. rose slightly.
c. fell slightly.
d. fell substantially.
41. In 1980, the U.S. misery index was
a. much higher than average.
b. slightly higher than average.
c. about average.
d. below average.
The Short-Run Trade-off between Inflation and Unemployment 8609
42. In the 1970s, the Fed accommodated a(n)
a. adverse supply shock and so contributed to higher inflation.
b. adverse supply shock and so contributed to lower inflation.
c. favorable supply shock and so contributed to higher inflation.
d. favorable supply shock and so contributed to lower inflation.
43. In the 1970’s the Federal Reserve responded to an adverse supply shock. Its policy made
a. the recession that followed smaller and so provided a more favorable tradeoff between inflation
and unemployment.
b. the recession that followed smaller, but in doing so produced a less favorable tradeoff between
inflation and unemployment.
c. the recession that followed larger, but in doing so provided a more favorable tradeoff between
inflation and unemployment.
d. the recession that followed larger and also produced a less favorable tradeoff between inflation
and unemployment.
8610 The Short-Run Trade-off between Inflation and Unemployment
44. In 1980, the U.S. economy had an inflation rate of
a. about 1 percent and an unemployment rate of about 7 percent.
b. less than 4 percent and an unemployment rate of less than 6 percent.
c. less than 7 percent and an unemployment rate of about 9 percent.
d. more than 9 percent and an unemployment rate of about 7 percent.
45. In 1980, the combination of inflation and unemployment the U.S. was experiencing
a. resulted from a leftward shift of the short-run Phillips curve.
b. was consistent with feasible inflation-unemployment combinations provided by the Phillips
curve of the 1960s.
c. followed two supply shocks that were triggered by the Organization of Petroleum Exporting
Countries.
d. All of the above are correct.
The Short-Run Trade-off between Inflation and Unemployment 8611
46. An adverse supply shock shifts the short-run Phillips curve to the
a. right. This means the unemployment rate is higher at each inflation rate.
b. right. This means the unemployment rate is lower at each inflation rate.
c. left. This means the unemployment rate is higher at each inflation rate.
d. left. This means the unemployment rate is lower at each inflation rate.
47. There is an adverse supply shock. In response the Federal Reserve pursues an expansionary
monetary policy. Taking into account both the shock and the Federal Reserve’s policy, which of
the following are we sure of?
a. unemployment will be higher
b. unemployment will be lower
c. inflation will be higher
d. inflation will be lower
8612 The Short-Run Trade-off between Inflation and Unemployment
48. A favorable supply shock
a. raises unemployment and the inflation rate.
b. raises unemployment and reduces the inflation rate.
c. reduces unemployment and raises the inflation rate.
d. reduces unemployment and the inflation rate.
49. If the Federal Reserve accommodates an adverse supply shock,
a. inflation expectations may rise which shifts the short-run Phillips curve shifts right.
b. inflation expectations may rise which shifts the short-run Phillips curve shifts left.
c. inflation expectations may fall which shifts the short-run Phillips curve shifts right.
d. inflation expectations may fall which shifts the short–run Phillips curve shifts left
The Short-Run Trade-off between Inflation and Unemployment 8613
50. A shock increases the costs of production. Given the effects of this shock, if the central bank
wants to return the unemployment rate towards its previous level it would
a. increase the rate at which the money supply increases. This will also move inflation closer to its
previous rate..
b. increase the rate at which the money supply increases. However, this will make inflation higher
than its previous rate
c. decrease the rate at which the money supply increases. This will also move inflation closer to
its original rate
d. decrease the rate at which the money supply increases. However, this will make higher than
its previous rate.
51. There is a temporary adverse supply shock. Given the effects of this shock, if the central bank
chooses to return unemployment closer to its previous rate it would
a. raise the rate at which it increases the money supply. In the long run this will shift the short–run
Phillips curve right.
b. raise the rate at which it increases the money supply. In the long run this will shift the short-run
Phillips curve left.
c. reduce the rate at which it increases the money supply. In the long run this will shift the short–
run Phillips curve right.
d. reduce the rate at which it increases the money supply. In the long run this will shift the short-
run Phillips curve left.
8614 The Short-Run Trade-off between Inflation and Unemployment
52. An increase in the price of oil shifts the
a. short–run Phillips curve right and the unemployment rate rises.
b. short-run Phillips curve right and the unemployment rate falls.
c. short-run Phillips curve left and the unemployment rate rises.
d. short-run Phillips curve left and the unemployment rate falls.
53. After an oil price shock, which of the following would move unemployment back towards its
natural rate?
a. the Fed sells bonds
b. the government raises taxes
c. the government increases expenditures
d. All of the above are correct.
The Short-Run Trade-off between Inflation and Unemployment 8615
54. In which case, if any, will inflation remain higher after a temporary adverse supply shock?
a. both when the central bank maintains a higher money supply growth rate and when the central
bank does nothing
b. only if the central bank does nothing
c. only if the central bank maintains a higher money supply growth rate
d. None of the above is correct. Whether the central bank maintains a higher money supply
growth rate or not, the inflation rate will return to its original level.
55. If there is an increase in the price of oil, then
a. unemployment rises. If the central bank tries to counter this increase, inflation rises.
b. unemployment rises. If the central bank tries to counter this increase, inflation falls.
c. unemployment falls. If the central bank tries to counter this decrease, inflation falls.
d. unemployment falls. If the central bank tries to counter this decrease, inflation rises.
8616 The Short-Run Trade-off between Inflation and Unemployment
56. A favorable supply shock shifts the short-run Phillips curve
a. right and inflation rises.
b. right and inflation falls.
c. left and inflation rises.
d. left and inflation falls.
57. If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should
a. increase the money supply growth rate which raises the inflation rate.
b. increase the money supply growth rate which reduces the inflation rate.
c. decrease the money supply growth rate which raises the inflation rate.
d. decrease the money supply growth rate which reduces the inflation rate.
The Short-Run Trade-off between Inflation and Unemployment 8617
58. If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should
a. increase the money supply growth rate which raises the inflation rate.
b. increase the money supply growth rate which reduces the inflation rate.
c. decrease the money supply growth rate which raises the inflation rate.
d. decrease the money supply growth rate which reduces the inflation rate.
59. If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should
a. increase the money supply growth rate which also moves unemployment closer to its natural
rate.
b. increase the money supply growth rate, but this moves unemployment further from its natural
rate.
c. decrease the money supply growth rate which also moves unemployment closer to its natural
rate.
d. decrease the money supply growth rate, but this moves unemployment further from its natural
rate.
8618 The Short-Run Trade-off between Inflation and Unemployment
Multiple Choice – Section 04: The Cost of Reducing Inflation
1. Soon after he became the chairman of the Federal Reserve System in 1979, Paul Volcker
embarked on a course
a. of accommodative monetary policy.
b. of disinflation.
c. that was designed to reduce the unemployment rate.
d. that produced results that were clearly consistent with those predicted by rational-expectations
theorists.
2. In 1979, Fed chair Paul Volcker decided to pursue a policy
a. that would lead to disinflation.
b. that would create falling prices.
c. to accommodate continuing adverse supply shocks.
d. that maintained money growth at its current level.
The Short-Run Trade-off between Inflation and Unemployment 8619
3. Disinflation is defined as a
a. zero rate of inflation.
b. constant rate of inflation.
c. reduction in the rate of inflation.
d. negative rate of inflation.
4. Disinflation is a reduction in
a. the price level.
b. the inflation rate.
c. the consumer price index.
d. All of the above are correct.
8620 The Short-Run Trade-off between Inflation and Unemployment
5. Disinflation is a
a. reduction in the price level, whereas deflation is a reduction in the rate of inflation.
b. reduction in the rate of inflation, whereas deflation is a reduction in the price level.
c. slow reduction in the price level, whereas deflation is a rapid reduction in the price level.
d. rapid reduction in the price level, whereas deflation is a slow reduction in the price level.
6. Disinflation is like
a. slowing a car down, whereas deflation is like putting the car into reverse gear.
b. maintaining a car’s speed, whereas deflation is like slowing the car down.
c. putting a car into reverse gear, whereas deflation is like slowing the car down.
d. maintaining a car’s speed, whereas deflation is like putting the car into reverse gear.
The Short-Run Trade-off between Inflation and Unemployment 8621
7. Disinflation would eventually cause
a. the short-run and the long run Phillips curve to shift right.
b. the short-run and the long run Phillips curve to shift left.
c. the short-run Phillips curve but not the long run Phillips curve to shift right.
d. the short-run Phillips curve but not the long run Phillips curve to shift left.
8. Contractionary monetary policy
a. leads to disinflation and makes the short-run Phillips curve shift right.
b. leads to disinflation and makes the short-run Phillips curve shift left.
c. does not lead to disinflation but makes the short-run Phillips curve shift right.
d. does not lead to disinflation but makes the short-run Phillips curve shift left.
9. The sacrifice ratio is the
a. sum of the inflation and unemployment rates.
b. inflation rate divided by the unemployment rate.
c. number of percentage points annual output falls for each percentage point reduction in inflation.
d. number of percentage points unemployment rises for each percentage point reduction in inflation.
8622 The Short-Run Trade-off between Inflation and Unemployment
10. If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and
unemployment rises 2 percentage points for one year, the sacrifice ratio is
a. 1/5.
b. 2.
c. 5/2.
d. 5.
11. If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points and
unemployment rise 3 percentage points for six months, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. 4.
The Short-Run Trade-off between Inflation and Unemployment 8623
12. If a central bank reduced inflation by 2 percentage points and that made output fall by 3
percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2
years, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. None of the above is correct.
13. If a central bank reduced inflation by 2 percentage points and that made output fall by 1
percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2
years, the sacrifice ratio is
a. 1/2.
b. 1.
c. 2.
d. 4.
8624 The Short-Run Trade-off between Inflation and Unemployment
14. If a central bank reduced inflation by 3 percentage points and in the short run this made output fall
by 3 percentage points for 3 years and the unemployment rate rise from 3 percent to 9 percent for
three years, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. None of the above is correct.
15. In 1979, when the Fed was deciding how aggressively to fight inflation, the typical estimate of the
sacrifice ratio was
a. 1.
b. 5.
c. 7.
d. 10.