The Short–Run Trade-off between Inflation and Unemployment
Multiple Choice – Section 00: Introduction
1. Closely watched indicators such as the inflation rate and unemployment are released each month
by the
a. Bureau of the Budget.
b. Bureau of Labor Statistics.
c. Department of the Treasury.
d. President’s Council of Economic Advisors.
2. The misery index is calculated as the
a. inflation rate plus the unemployment rate.
b. unemployment rate minus the inflation rate.
c. actual inflation rate minus the expected inflation rate.
d. natural unemployment rate times the inflation rate
8466 The Short-Run Trade-off between Inflation and Unemployment
3. The misery index is supposed to measure the
a. social cost of unemployment.
b. health of the economy.
c. lost output associated with a particular unemployment rate.
d. short-run tradeoff between inflation and unemployment.
4. One determinant of the natural rate of unemployment is the
a. rate of growth of the money supply.
b. minimum wage rate.
c. expected inflation rate.
d. All of the above are correct.
5. In the long run,
a. the natural rate of unemployment depends primarily on the level of aggregate demand.
b. inflation depends primarily upon the money supply growth rate.
c. there is a tradeoff between the inflation rate and the natural rate of unemployment.
d. All of the above are correct.
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6. One determinant of the long-run average unemployment rate is the
a. market power of unions, while the inflation rate depends primarily upon government spending.
b. minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
c. rate of growth of the money supply, while the inflation rate depends primarily upon the market
power of unions.
d. existence of efficiency wages, while the inflation rate depends primarily upon the extent to
which firms are competitive.
7. In the long run,
a. the natural rate of unemployment depends primarily on the level of aggregate demand.
b. inflation depends primarily upon the money supply growth rate.
c. there is a tradeoff between the inflation rate and the natural rate of unemployment.
d. All of the above are correct.
8468 The Short-Run Trade-off between Inflation and Unemployment
8. In the long run, inflation
a. and unemployment are primarily determined by labor market factors.
b. and unemployment are primarily determined by the rate of money supply growth.
c. is primarily determined by the rate of money supply growth while unemployment is primarily
determined by labor market factors.
d. is primarily determined by labor market factors while unemployment is primarily determined by
the rate of money supply growth.
9. Which of the following statements is correct?
a. In the short run, unemployment and inflation are positively related. In the long run they are
largely unrelated problems.
b. Inflation and unemployment are positively related in the short run and in the long run.
c. In the short run, unemployment and inflation are negatively related. In the long run they are
largely unrelated problems.
d. Inflation and unemployment are negatively related in the short run and in the long run.
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10. Which of the following depends primarily on the growth rate of the money supply?
a. inflation and the natural rate of unemployment
b. inflation but not the natural rate of unemployment
c. the natural rate of unemployment but not inflation
d. neither inflation nor the natural rate of unemployment
11. A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
a. downward pressures on prices and wages.
b. downward pressures on prices and upward pressures on wages.
c. upward pressures on prices and downward pressures on wages.
d. upward pressures on prices and wages.
12. In the long run, which of the following depends primarily on the growth rate of the money supply?
a. the natural rate of unemployment and the inflation rate
b. the natural rate of unemployment but not the inflation rate
c. the inflation rate but not the natural rate of unemployment
d. neither the natural rate of unemployment nor the inflation rate
8470 The Short-Run Trade-off between Inflation and Unemployment
13. When monetary and fiscal policymakers expand aggregate demand, which of the following costs
is incurred in the short run?
a. Short-run aggregate supply decreases.
b. The natural rate of unemployment increases.
c. The price level increases more rapidly.
d. The money supply increases less rapidly.
14. Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the
following is a short- run consequence of this contraction?
a. The inflation rate decreases.
b. The level of output decreases.
c. The unemployment rate increases.
d. All of the above are correct.
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Multiple Choice – Section 01: The Phillips Curve
1. The short-run relationship between inflation and unemployment is often called
a. the Classical Dichotomy.
b. Money Neutrality.
c. the Phillips curve.
d. None of the above is correct.
2. Economist A.W. Phillips found a negative correlation between
a. output and unemployment.
b. unemployment and the interest rate.
c. output and the interest rate.
d. wage inflation and unemployment.
8472 The Short-Run Trade-off between Inflation and Unemployment
3. The economist A.W. Phillips published a famous article in 1958 in which he showed a
a. negative correlation between the rate of unemployment and the rate of inflation.
b. positive correlation between the rate of unemployment and the rate of inflation.
c. negative correlation between the rate of unemployment and the rate of interest.
d. positive correlation between the rate of unemployment and the rate of interest
4. A.W. Phillips found a
a. positive relation between unemployment and inflation in the United Kingdom.
b. positive relation between unemployment and inflation in the United States.
c. negative relation between unemployment and inflation in the United States.
d. negative relation between unemployment and inflation in the United Kingdom.
5. A. W. Phillips’ findings were based on data
a. from 1861-1957 for the United Kingdom.
b. from 1861-1957 for the United States.
c. mostly from the post-World War II period in the United Kingdom.
d. mostly from the post-World War II period in the United States.
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6. In his famous article published in an economics journal in 1958, A.W. Phillips
a. used data for the United States to show a negative relationship between the rate of change of
the U.S. consumer price index and the U.S. unemployment rate.
b. used data for the United States to show a negative relationship between the rate of change of
wages in the U.S. and the U.S. unemployment rate.
c. used data for the United Kingdom to show a negative relationship between the rate of change of
the U.K. consumer price index and the U.K. unemployment rate.
d. used data for the United Kingdom to show a negative relationship between the rate of change of
wages in the U.K. and the U.K. unemployment rate.
7. A.W. Phillips’s discovery of a particular relationship between unemployment and inflation for the
United Kingdom
a. could not be extended to other countries, despite many researchers’ attempts to provide that
extension.
b. was quickly extended to other countries by researchers.
c. was extended to only one other country — the United States.
d. was harshly criticized by the American economists Paul Samuelson and Robert Solow on the
grounds that Phillips’s study was fundamentally flawed.
8474 The Short-Run Trade-off between Inflation and Unemployment
8. Samuelson and Solow argued that when unemployment is high, there is
a. upward pressure on wages and prices.
b. upward pressure on wages and downward pressure on prices.
c. upward pressure on prices and downward pressure on wages.
d. downward pressure on wages and prices.
9. Samuelson and Solow reasoned that when aggregate demand was high, unemployment was
a. low, so there was upward pressure on wages and prices.
b. low, so there was downward pressure on wages and prices.
c. high, so there was upward pressure on wages and prices.
d. high, so there was downward pressure on wages and prices.
10. Samuelson and Solow reasoned that when aggregate demand was low, unemployment was
a. high, so there was upward pressure on wages and prices.
b. high, so there was downward pressure on wages and prices.
c. low, so there was upward pressure on wages and prices.
d. low, so there was downward pressure on wages and prices.
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11. Samuelson and Solow believed that the Phillips curve
a. implied that low unemployment was associated with low inflation.
b. indicated that the aggregate supply and aggregate demand model was incorrect.
c. offered policymakers a menu of possible economic outcomes from which to choose.
d. All of the above are correct.
12. Samuelson and Solow argued that when unemployment is high,
a. aggregate demand is high, which puts upward pressure on wages and prices.
b. aggregate demand is high, which puts downward pressure on wages and prices.
c. aggregate demand is low, which puts upward pressure on wages and prices.
d. aggregate demand is low, which puts downward pressure on wages and prices.
13. Samuelson and Solow argued that a combination of low unemployment and low inflation
a. was impossible given the historical data as summarized by the Phillips curve.
b. could be achieved with an “appropriate” fiscal policy.
c. could be achieved with an “appropriate” monetary policy.
d. could be achieved with an “appropriate” mix of monetary and fiscal policies.
8476 The Short-Run Trade-off between Inflation and Unemployment
14. According to the Phillips curve, policymakers could reduce both inflation and unemployment by
a. increasing the money supply.
b. increasing government expenditures.
c. raising taxes.
d. None of the above is correct.
15. According to the Phillips curve, policymakers would reduce inflation but raise unemployment if
they
a. decreased the money supply.
b. increased government expenditures.
c. decreased taxes.
d. None of the above is correct.
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16. According to the Phillips curve, policymakers can reduce inflation by
a. contracting aggregate demand. This contraction results in a temporarily higher unemployment
rate.
b. contracting aggregate demand. This contraction results in a temporarily lower unemployment
rate.
c. expanding aggregate demand. This expansion results in a temporarily lower unemployment rate.
d. expanding aggregate demand. This expansion results in a temporarily higher unemployment
rate.
17. The short–run Phillips curve shows the combinations of
a. unemployment and inflation that arise in the short run as aggregate demand shifts the economy
along the short–run aggregate supply curve.
b. unemployment and inflation that arise in the short run as short-run aggregate supply shifts the
economy along the aggregate demand curve.
c. real GDP and the price level that arise in the short run as short–run aggregate supply shifts the
economy along the aggregate demand curve.
d. None of the above is correct.
8478 The Short-Run Trade-off between Inflation and Unemployment
18. When aggregate demand shifts rightward along the short-run aggregate-supply curve, inflation
a. increases and unemployment increases.
b. increases and unemployment decreases.
c. decreases and unemployment increases.
d. decreases and unemployment decreases.
19. When aggregate demand shifts right along the short-run aggregate supply curve, unemployment
a. falls, so there are upward pressures on wages and prices.
b. falls, so there are downward pressures on wages and prices.
c. rises, so there are upward pressures on wages and prices.
d. rises, so there are downward pressures on wages and prices.
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20. There is a
a. short–run tradeoff between inflation and unemployment.
b. short-run tradeoff between the actual unemployment rate and the natural rate of
unemployment.
c. long-run tradeoff between inflation and unemployment.
d. long-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
21. In the short run, policy that changes aggregate demand changes
a. both unemployment and the price level.
b. neither unemployment nor the price level.
c. only unemployment.
d. only the price level.
8480 The Short-Run Trade-off between Inflation and Unemployment
22. If policymakers decrease aggregate demand, then in the short run the price level
a. falls and unemployment rises.
b. and unemployment fall.
c. and unemployment rise.
d. rises and unemployment falls.
23. If policymakers increase aggregate demand, then in the short run the price level
a. falls and unemployment rises.
b. and unemployment fall.
c. and unemployment rise.
d. rises and unemployment falls.
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24. Unemployment would decrease and prices would increase if
a. aggregate demand shifted right.
b. aggregate demand shifted left.
c. aggregate supply shifted right.
d. aggregate supply shifted left.
25. If the government raises government expenditures, then in the short run prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
8482 The Short-Run Trade-off between Inflation and Unemployment
26. If the central bank decreases the money supply, then in the short run prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
27. If the central bank increases the money supply, then in the short run prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
28. If the central bank increases the money supply, in the short run, output
a. rises so unemployment rises.
b. rises so unemployment falls.
c. falls so unemployment rises.
d. falls so unemployment falls.
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29. If a central bank decreases the money supply, then
a. prices, output, and unemployment rise.
b. prices and output rise and unemployment falls.
c. prices rise and output and unemployment fall.
d. prices and output fall and unemployment rises.
30. Suppose that the money supply increases. In the short run, this increases prices according to
a. both the short-run Phillips curve and the aggregate demand and aggregate supply model.
b. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
c. the short-run Phillips curve, but not according to the aggregate demand and aggregate supply
model.
d. the aggregate demand and aggregate supply model but not according to the short-run Phillips
curve.
8484 The Short-Run Trade-off between Inflation and Unemployment
31. Suppose that the money supply decreases. In the short run, this increases prices according to
a. both the short-run Phillips curve and the aggregate demand and aggregate supply model.
b. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
c. the short-run Phillips curve, but not according to the aggregate demand and aggregate supply
model.
d. the aggregate demand and aggregate supply model but not according to the short-run Phillips
curve.
32. Suppose that the money supply increases. In the short run this decreases unemployment according
to
a. both the short-run Phillips curve and the aggregate demand and aggregate supply model.
b. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
c. the short-run Phillips curve, but not according to the aggregate demand and supply model.
d. the aggregate demand and aggregate supply model, but not according to the short-run Phillips
curve.