The Short-Run Trade-off between Inflation and Unemployment 8505
70. When aggregate demand shifts left along the short-run aggregate supply curve,
a. unemployment and prices rise.
b. unemployment rises and prices fall.
c. unemployment falls and prices rise.
d. unemployment and prices fall.
71. During the financial crisis Congress and President Obama authorized tax cuts and increases in
government spending.
According to the Phillips curve, in the short run these policies should have
a. reduced inflation and unemployment.
b. raised inflation and unemployment.
c. reduced inflation and raised unemployment.
d. raised inflation and reduced unemployment.
8506 The Short-Run Trade-off between Inflation and Unemployment
72. If the central bank increases the money supply, in the short run, the price level
a. and unemployment rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment fall.
73. If the central bank decreases the money supply, then output
a. and unemployment rises.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment falls.
The Short-Run Trade-off between Inflation and Unemployment 8507
74. As aggregate demand shifts left along the short-run aggregate supply curve,
a. inflation and unemployment are higher.
b. inflation is higher and unemployment is lower.
c. unemployment is higher and inflation is lower.
d. unemployment and inflation are lower.
75. If consumption expenditures fall, then in the short run
a. inflation and unemployment rise.
b. inflation rises and unemployment falls.
c. inflation falls and unemployment rises.
d. inflation and unemployment fall.
8508 The Short-Run Trade-off between Inflation and Unemployment
76. Which of the following would we not expect if government policy moves the economy up along a
given short-run Phillips curve?
a. Mark gets an increase in his nominal wage.
b. Bob gets more job offers.
c. Susan reduces prices at her pizza restaurant.
d. Tom reads that the central bank recently raised the money supply
77. Other things constant, which of the following would reduce unemployment and raise inflation?
a. businesses become more optimistic about the future of the economy
b. because of high growth abroad, net exports rise
c. the government cuts taxes
d. All of the above are correct.
The Short-Run Trade-off between Inflation and Unemployment 8509
78. If more firms chose to pay efficiency wages, which of the following would shift to the right?
a. both the long–run Phillips curve and the long–run aggregate supply curve
b. the long-run Phillips curve but not the long-run aggregate supply curve
c. the long-run aggregate supply curve but not the long–run Phillips curve
d. neither the long–run Phillips curve nor the long-run aggregate supply curve
79. If consumer confidence rises, then aggregate demand shifts
a. right, making inflation higher than otherwise.
b. right, making inflation lower than otherwise.
c. left, making inflation higher than otherwise.
d. left, making inflation lower than otherwise.
8510 The Short-Run Trade-off between Inflation and Unemployment
80. If taxes rise, then aggregate demand shifts
a. right, making unemployment higher than otherwise.
b. right, making unemployment lower than otherwise.
c. left, making unemployment higher than otherwise.
d. left, making unemployment lower than otherwise.
81. Which of the following increases inflation and reduces unemployment in the short run?
a. either an increase in government expenditures by itself or an increase in the money supply
growth rate by itself
b. an increase in government expenditures, but not an increase in the money supply growth rate
c. an increase in the money supply growth rate, but not an increase in government expenditures
d. neither an increase in government expenditures nor an increase in the money supply
The Short-Run Trade-off between Inflation and Unemployment 8511
82. Samuelson and Solow argued that
a. high unemployment puts upward pressures on wages and prices.
b. given the historical evidence, a combination of low inflation and low unemployment was not
possible.
c. Both A and B are correct.
d. None of the above are correct.
Multiple Choice – Section 02: Shifts in the Phillips Curve: The Role of Expectations
1. In 1968, economist Milton Friedman published a paper criticizing the Phillips curve on the grounds
that
a. it seemed to work for wages but not for inflation.
b. monetary policy was ineffective in combating inflation.
c. the Phillips curve did not apply in the long run.
d. Phillips had made errors in collecting his data.
8512 The Short-Run Trade-off between Inflation and Unemployment
2. In the late 1960s, economist Edmund Phelps published a paper that
a. argued that there was no long-run tradeoff between inflation and unemployment.
b. disproved Friedman’s claim that monetary policy was effective in controlling inflation.
c. showed the optimal point on the Phillips curve was at an unemployment rate of 5 percent and an
inflation rate of 2 percent.
d. argued that the Phillips curve was stable and that it would not shift.
3. In the late 1960s, Milton Friedman and Edmund Phelps argued that
a. the trade-off between inflation and unemployment did not apply in the long run This claim is
consistent with monetary neutrality in the long run.
b. the trade–off between inflation and unemployment did not apply in the long run. This claim is
inconsistent with monetary neutrality in the long run.
c. the trade-off between inflation and unemployment applied in both the short run and the long run.
This claim is consistent with monetary neutrality in the long run.
d. the trade-off between inflation and unemployment applied in both the short run and the long run.
This claim is inconsistent with monetary neutrality in the long run.
The Short-Run Trade-off between Inflation and Unemployment 8513
4. Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve
is
a. downward-sloping, which implies that monetary and fiscal policies can influence the level of
unemployment in the long run.
b. downward-sloping, which implies that monetary and fiscal policies cannot influence the rate of
inflation in the long run.
c. vertical, which implies that monetary and fiscal policies cannot influence the level of
unemployment in the long run.
d. vertical, which implies that monetary and fiscal policies cannot influence the rate of inflation in
the long run.
5. In the late 1960’s, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation
and unemployment
a. existed in the long run and the short run.
b. existed in the long run but not the short run.
c. existed in the short run but not the long run.
d. did not exist.
8514 The Short-Run Trade-off between Inflation and Unemployment
6. Friedman and Phelps argued
a. that in the long run, monetary growth did not influence those factors that determine the
economy’s unemployment rate.
b. that the Phillips curve could be exploited in the long run by using monetary, but not fiscal policy.
c. that the short-run Phillips curve was very steep, but not vertical.
d. that there was neither a short–run nor long–run tradeoff between inflation and unemployment.
7. According to classical macroeconomic theory, in the long run
a. monetary growth affects both real and nominal variables.
b. the only real variable affected by monetary growth is the unemployment rate.
c. a number of factors that affect unemployment are influenced by monetary growth.
d. monetary growth affects nominal but not real variables.
The Short-Run Trade-off between Inflation and Unemployment 8515
8. Milton Friedman argued that the Fed’s control over the money supply could be used to peg
a. the level or growth rate of a nominal variable, but not the level or growth rate of a real variable.
b. the level of a nominal or real variable, but not the growth rate of a real or nominal variable.
c. the level or growth rate of a real variable, but not the level or growth rate of a nominal variable.
d. both levels and growth rates of both real and nominal variables.
9. Friedman argued that the Fed could use monetary policy to peg
a. nominal exchange rates.
b. the level of real GDP.
c. the rate of unemployment.
d. None of the above is correct.
10. Friedman argued that the Fed could use monetary policy to peg
a. the level of real GDP.
b. the growth rate of real GDP.
c. the rate of unemployment.
d. None of the above is correct.
8516 The Short-Run Trade-off between Inflation and Unemployment
11. In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the
a. unemployment rate.
b. inflation rate.
c. growth rate of real national income.
d. All of the above are correct.
12. According to the long-run Phillips curve, in the long run monetary policy influences
a. both the inflation rate and the unemployment rate.
b. the inflation rate but not the unemployment rate.
c. the unemployment rate but not the inflation rate.
d. neither the unemployment rate nor the inflation rate.
The Short-Run Trade-off between Inflation and Unemployment 8517
13. According to the Phillips curve, unemployment and inflation are negatively related in
a. the short run and in the long run.
b. the short run, but not in the long run.
c. the long run, but not in the short run.
d. neither the long run nor the short run.
14. According to the Phillips curve, unemployment and inflation are positively related in
a. the short run and in the long run.
b. the short run, but not in the long run.
c. the long run, but not in the short run.
d. neither the long run nor the short run.
8518 The Short-Run Trade-off between Inflation and Unemployment
15. One way to express the classical idea of monetary neutrality is to draw
a. a downward–sloping short–run Phillips curve.
b. an upward-sloping short-run Phillips curve.
c. a downward-sloping long–run Phillips curve.
d. a vertical long–run Phillips curve.
16. A vertical long-run Phillips curve is consistent with
a. the conclusion of Friedman and Phelps, but it is not consistent with the classical idea of
monetary neutrality.
b. the classical idea of monetary neutrality, but it is not consistent with the conclusion of Friedman
and Phelps.
c. both the conclusion of Friedman and Phelps and the classical idea of monetary neutrality.
d. neither the conclusion of Friedman and Phelps nor the classical idea of monetary neutrality.
The Short-Run Trade-off between Inflation and Unemployment 8519
17. By raising aggregate demand more than anticipated, policymakers
a. reduce unemployment for awhile.
b. raise unemployment for awhile.
c. reduce unemployment permanently.
d. None of the above is correct.
18. In the long run, if the Fed increases the growth rate of the money supply,
a. inflation will be higher.
b. unemployment will be lower.
c. real GDP will be higher.
d. All of the above are correct.
8520 The Short-Run Trade-off between Inflation and Unemployment
19. In the long run, if the Fed decreases the growth rate of the money supply,
a. inflation will be lower.
b. unemployment will be higher.
c. real GDP will be lower.
d. All of the above are correct.
20. If the Federal Reserve increases the rate at which it increases the money supply, then
unemployment is lower
a. in the long run and the short run.
b. in the long run but not the short run.
c. in the short run but not the long run.
d. in neither the short run nor the long run.
The Short-Run Trade-off between Inflation and Unemployment 8521
21. If the Federal Reserve decreases the rate at which it increases the money supply, then
unemployment is higher in
a. the long run and the short run.
b. the long run but not the short run.
c. the short run but not the long run.
d. neither the short run nor the long run.
22. If the Federal Reserve increases the growth rate of the money supply, in the long run
a. inflation is higher and the unemployment rate is lower.
b. inflation is higher while the unemployment rate is unchanged.
c. inflation is unchanged while the unemployment rate is lower.
d. None of the above is correct.
8522 The Short-Run Trade-off between Inflation and Unemployment
23. In the long run, if the Fed decreases the rate at which it increases the money supply,
a. inflation and unemployment will be higher.
b. inflation will be higher and unemployment will be lower.
c. inflation will be lower and unemployment will be higher.
d. None of the above is correct.
24. The natural rate of unemployment
a. is constant over time.
b. varies over time, but can’t be changed by the government.
c. is the unemployment rate that the economy tends to move to in the long run.
d. depends on the rate at which the Fed increases the money supply.
25. The natural rate of unemployment
a. is constant over time.
b. varies over time, but can’t be changed by the government.
c. is the socially desirable rate of unemployment.
d. does not depend on the rate at which the Fed increases the money supply.
The Short-Run Trade-off between Inflation and Unemployment 8523
26. To say that the natural rate of unemployment changes over time is to say that
a. the short-run Phillips curve shifts over time.
b. the long-run Phillips curve shifts over time.
c. the aggregate demand curve shifts over time.
d. the Federal Reserve influences the natural rate of unemployment over time.
27. Which of the following would reduce the natural rate of unemployment?
a. both an increase in the rate of money growth and increased unemployment compensation
b. an increase in the rate of money growth but not increased unemployment compensation
c. an increase in unemployment compensation but not an increase in the rate of money growth.
d. neither an increase in unemployment compensation nor an increase in the rate of money
growth.
8524 The Short-Run Trade-off between Inflation and Unemployment
28. Which of the following is correct according to the long–run Phillips curve?
a. No government policy, including changes in the money supply growth rate, can change the
natural rate of unemployment.
b. Changes in the money supply growth rate are the only means by which government policy can
change the natural rate of unemployment.
c. Monetary policy cannot change the natural rate of unemployment, but other government
policies can.
d. Monetary policy and other government policies can shift the long-run Phillips curve.
29. Which of the following leads to a lower level of unemployment in the long run?
a. both an increase in the size of the money supply and an increase in the money supply growth
rate
b. an increase in the size of the money supply but not an increase in the money supply growth rate
c. an increase in the money supply growth rate, but not an increase in the size of the money
supply
d. neither an increase in the size of the money supply nor an increase in the money supply growth
rate