The Short-Run Trade-off between Inflation and Unemployment 8585
155. The long–run Phillips curve would shift to the left if
a. the money supply growth rate increased or labor markets become more flexible.
b. the money supply growth rate increased but not if labor markets become more flexible.
c. labor markets become more flexible but not if the money supply growth rate increased.
d. None of the above is correct.
156. The long–run Phillips curve would shift to the right if
a. the money supply growth rate decreased or if labor markets become more flexible.
b. the money supply growth rate decreased, but not if labor markets become more flexible.
c. labor markets become more flexible, but not if the money supply growth rate decreased.
d. None of the above is correct.
8586 The Short-Run Trade-off between Inflation and Unemployment
157. The long–run Phillips curve would shift to the left if
a. the money supply growth rate increased or if effective job-training programs were
implemented.
b. the money supply growth rate increased, but not if effective job-training programs were
implemented.
c. effective job-training programs were implemented, but not if the money supply growth rate
increased.
d. None of the above is correct.
158. If the central bank increases the growth rate of the money supply and initially inflation
expectations are unchanged, then in the short run
a. unemployment rises. In the long run the short-run Phillips curve shifts left.
b. unemployment rises. In the long run the short-run Phillips curve shifts right.
c. unemployment falls. In the long run the short-run the Phillips curve shifts left.
d. unemployment falls. In the long run the short-run the Phillips curve shifts right.
The Short-Run Trade-off between Inflation and Unemployment 8587
159. If inflation expectations rise, the short-run Phillips curve shifts
a. right, so that at any inflation rate output is higher in the short run than before.
b. left, so that at any inflation rate output is higher in the short run than before.
c. right, so that at any inflation rate output is lower in the short run than before.
d. left, so that at any inflation rate output is lower in the short run than before.
160. For a given level of inflation expectations, if the central bank increases the money supply growth
rate, then in the short run
a. the economy moves down along the short–run Phillips curve.
b. the economy moves up along the short-run Phillips curve.
c. the Phillips curve shifts right.
d. the Phillips curve shifts left.
8588 The Short-Run Trade-off between Inflation and Unemployment
161. If the central bank keeps the money supply growth rate constant, but people raise their inflation
expectations by 1 percentage point, then the short–run Phillips curve shifts
a. right and the unemployment rate rises.
b. right and the unemployment rate falls.
c. left and the unemployment rate rises.
d. left and the unemployment rate falls.
162. If a central bank increases the money supply growth rate, then in the short run
a. unemployment rises. In the long run the short-run Phillips curve shifts right.
b. unemployment rises. In the long run the short-run Phillips curve shifts left.
c. unemployment falls. In the long run the short–run Phillips curve shifts right.
d. unemployment falls. In the long run the short–run Phillips curve shifts left.
The Short-Run Trade-off between Inflation and Unemployment 8589
Multiple Choice – Section 03: Shifts in the Phillips Curve: The Role of Supply Shocks
1. An event that directly affects firms’ costs of production and thus the prices they charge is called
a. a Phillips contraction.
b. an inflationary spiral.
c. a demand shock.
d. a supply shock.
2. Which of the following is an example of an adverse supply shock?
a. a decrease in the money supply
b. a tax cut
c. a worldwide drought
d. decreased government spending
8590 The Short-Run Trade-off between Inflation and Unemployment
3. An adverse supply shock will shift short–run aggregate supply
a. right, making prices rise.
b. left, making prices rise.
c. right, making prices fall.
d. left, making prices fall.
4. An adverse supply shock will cause output
a. and prices to rise.
b. and prices to fall.
c. to rise and prices to fall.
d. to fall and prices to rise.
The Short-Run Trade-off between Inflation and Unemployment 8591
5. Which of the following results in higher inflation and higher unemployment in the short run?
a. a more expansionary monetary policy
b. a more contractionary monetary policy
c. a decrease in the minimum wage
d. an adverse supply shock such as an increase in the price of oil
6. Which of the following is not associated with an adverse supply shock?
a. the short–run Phillips curve shifts left
b. unemployment rises
c. the price level rises
d. output falls
8592 The Short-Run Trade-off between Inflation and Unemployment
7. If there is an adverse supply shock, then
a. unemployment rises and the short-run Phillips curve shifts right.
b. unemployment rises and the short-run Phillips curve shifts left.
c. unemployment falls and the short–run Phillips curve shifts right.
d. unemployment falls and the short-run Phillips curve shifts left.
8. An adverse supply shock causes inflation to
a. rise and the short-run Phillips curve to shift right.
b. rise and the short-run Phillips curve to shift left.
c. fall and the short–run Phillips curve to shift right.
d. fall and the short–run Phillips curve to shift left.
9. Which of the following is correct if there is an adverse 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.
The Short-Run Trade-off between Inflation and Unemployment 8593
10. When they are confronted with an adverse shock to aggregate supply, policymakers face a
difficult choice in that
a. if they contract aggregate demand, the unemployment rate will increase further.
b. if they expand aggregate demand, the inflation rate will increase further.
c. they face a less favorable trade–off between inflation and unemployment than they did before
the shock.
d. All of the above are correct.
Figure 35-9. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two
aggregate-demand (AD) curves. On the right-hand diagram, “Inf Rate” means “Inflation Rate.”
AS
AD
P B
Y
AS
P
Y
A
2 1
2
1
2
1
Y
P
PC
PC12
C
D
Inf Rate
8594 The Short-Run Trade-off between Inflation and Unemployment
11. Refer to Figure 35-9. What is measured along the horizontal axis of the right-hand graph?
a. time
b. the unemployment rate
c. real GDP
d. the growth rate of real GDP
12. Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2
a. results in a more favorable trade-off between inflation and unemployment.
b. results in a more favorable trade-off between inflation and the growth rate of real GDP.
c. represents an adverse shock to aggregate supply.
d. represents a favorable shock to aggregate supply.
The Short-Run Trade-off between Inflation and Unemployment 8595
13. Refer to Figure 35-9. Which of the following events could explain the shift of the aggregate–
supply curve from AS1 to AS2?
a. a reduction in firms’ costs of production
b. a reduction in taxes on consumers
c. an increase in the price level
d. an increase in the world price of oil
14. Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2 could be a
consequence of
a. an increase in the money supply.
b. an adverse supply shock.
c. a decrease of output from Y1 to Y2.
d. a slow adjustment of people’s expectation of the inflation rate.
8596 The Short-Run Trade-off between Inflation and Unemployment
15. Refer to Figure 35-9. A significant increase in the world price of oil could explain
a. the shift of the aggregate-supply curve from AS1 to AS2, but it could not explain the shift of
the Phillips curve from PC1 to PC2.
b. the shift of the Phillips curve from PC1 to PC2, but it could not explain the shift of the
aggregate-supply curve from AS1 to AS2.
c. both the shift of the aggregate-supply curve from AS1 to AS2 and the shift of the Phillips
curve from PC1 to PC2.
d. neither the shift of the aggregate-supply curve from AS1 to AS2 nor the shift of the Phillips
curve from PC1 to PC2.
16. Refer to Figure 35-9. Faced with the shift of the Phillips curve from PC1 to PC2, policymakers
will
a. ask whether the shift is temporary or permanent.
b. be concerned with how people adjust their expectations of inflation as a result of the shift.
c. face, as well, a decision as to whether to accommodate the shock.
d. All of the above are correct.
The Short-Run Trade-off between Inflation and Unemployment 8597
17. Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve
will soon shift back to PC1 if people perceive the
a. increase in the inflation rate as a temporary aberration.
b. economic boom as a temporary aberration.
c. increase in the inflation rate as a sign of a new era of higher inflation.
d. economic boom as a sign of a new era of higher economic growth.
18. Refer to Figure 35-9. A movement of the economy from point A to point B, and at the same
time a movement from point C to point D, would be described as
a. the outcome of a favorable supply shock.
b. falling inflation.
c. stagflation.
d. All of the above are correct.
8598 The Short-Run Trade-off between Inflation and Unemployment
19. A favorable supply shock causes the price level to
a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.
20. A favorable supply shock causes output to
a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.
The Short-Run Trade-off between Inflation and Unemployment 8599
21. An adverse supply shock causes output to
a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.
22. If a central bank wants to counter the change in the price level caused by an adverse supply
shock, it could change the money supply to shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
8600 The Short-Run Trade-off between Inflation and Unemployment
23. If a central bank increases the money supply in response to an adverse supply shock, then which
of the following quantities moves closer to its pre-shock value as a result?
a. both the price level and output
b. the price level but not output
c. output but not the price level
d. neither output nor the price level
24. If a central bank decreases the money supply in response to an adverse supply shock, then which
of the following quantities moves closer to its pre-shock value as a result?
a. both the price level and output
b. the price level but not output
c. output but not the price level
d. neither output nor the price level
The Short-Run Trade-off between Inflation and Unemployment 8601
25. If there is an adverse supply shock and the Federal Reserve responds by increasing the growth
rate of the money
supply, then in the short run the Federal Reserve’s action
a. lowers both inflation and unemployment.
b. lowers inflation but raises unemployment.
c. raises inflation but lowers unemployment.
d. raises both inflation and unemployment.
26. If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the
a. right. It remains to the right regardless of monetary policy.
b. right. It remains to the right if the central bank pursues expansionary monetary policy.
c. left. It remains to the left regardless of monetary policy.
d. left. It remains to the left if the central bank pursues expansionary monetary policy.
8602 The Short-Run Trade-off between Inflation and Unemployment
27. If policymakers accommodate an adverse supply shock, then in the short run the unemployment
rate
a. and the inflation rate rise.
b. and the inflation rate fall.
c. rises and the inflation rate falls.
d. falls and the inflation rate rises.
28. A central bank that accommodates an aggregate supply shock
a. increases the money supply, making the inflation rate rise.
b. increases the money supply, making the inflation rate fall.
c. decreases the money supply, making the inflation rate rise.
d. decreases the money supply, making the inflation rate fall.
The Short-Run Trade-off between Inflation and Unemployment 8603
29. Which of the following shifts aggregate supply to the right?
a. a decline in the price of imported natural resources
b. a technological advance
c. an older labor force that leaves jobs less frequently
d. All of the above are correct.
30. Which of the following would not be associated with a favorable supply shock?
a. the short-run Phillips curve shifts left
b. unemployment falls
c. the price level rises
d. output rises.
8604 The Short-Run Trade-off between Inflation and Unemployment
31. A favorable supply shock will shift short-run aggregate supply
a. left, making output rise.
b. left, making output fall.
c. right, making output rise.
d. right, making output fall.
32. A favorable supply shock will cause the price level
a. and output to rise.
b. and output to fall.
c. to rise and output to fall.
d. to fall and output to rise.