The Short-Run Trade-off between Inflation and Unemployment 8565
114. In the long run, a decrease in the money supply growth rate
a. shifts the short-run Phillips curve left so inflation returns to its original rate.
b. shifts the short-run Phillips curve left so unemployment returns to its natural rate.
c. Both A and B are correct.
d. None of the above is correct.
115. In the long run a reduction in the money supply growth rate affects
a. the inflation rate and the natural rate of unemployment.
b. the inflation rate but not the natural rate of unemployment.
c. neither the inflation rate nor the natural rate of unemployment.
d. the natural rate of unemployment, but not the inflation rate.
116. In the long run an increase in the money supply growth rate affects
a. the inflation rate and the natural rate of unemployment.
b. the inflation rate, but not the natural rate of unemployment.
c. neither the inflation rate nor the natural rate of unemployment.
d. the natural rate of unemployment, but not the inflation rate.
8566 The Short-Run Trade-off between Inflation and Unemployment
117. Suppose the Fed decreased the growth rate of the money supply. Which of the following would
be lower in the long run?
a. both 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 unemployment rate nor the inflation rate
118. Suppose the Fed increased the growth rate of the money supply. Which of the following would be
higher in the long run?
a. both 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 unemployment rate nor the inflation rate
The Short-Run Trade-off between Inflation and Unemployment 8567
119. Other things the same, if there is an increase in the money supply growth rate that is larger than
expected, then in the short run
a. the natural rate of unemployment rises.
b. the natural rate of unemployment falls.
c. the unemployment rate will be above its natural rate.
d. the unemployment rate will be below its natural rate.
120. Suppose the Federal Reserve pursues contractionary monetary policy. In the long run
a. both inflation and the unemployment rate are higher than they were prior to the change in
policy.
b. inflation is higher and the unemployment rate is the same as it was prior to the change in
policy.
c. inflation is lower and the unemployment rate is lower than it was prior to the change in policy.
d. inflation is lower and unemployment is the same as it was prior to the change in policy.
8568 The Short-Run Trade-off between Inflation and Unemployment
121. Suppose the Federal Reserve makes monetary policy more expansionary. In the long run
a. both inflation and the unemployment rate are higher than they were prior to the change in
policy.
b. inflation is higher and the unemployment rate is the same as it was prior to the change in
policy.
c. inflation is lower and the unemployment rate is lower than it was prior to the change in policy.
d. inflation is lower and unemployment is the same as it was prior to the change in policy.
122. If the government reduced the minimum wage and pursued contractionary monetary policy, then
in the long run
a. both the unemployment rate and the inflation rate would be lower.
b. the unemployment rate would be lower and the inflation rate would be higher.
c. the unemployment rate would be higher and the inflation rate would be lower.
d. the unemployment rate and the inflation rate would be higher.
The Short-Run Trade-off between Inflation and Unemployment 8569
123. If the government reduced the minimum wage and pursued expansionary monetary policy, then in
the long run
a. both the unemployment rate and the inflation rate would be higher.
b. both the unemployment rate and the inflation rate would be lower.
c. the unemployment rate would be higher and the inflation rate would be lower.
d. the unemployment rate would be lower and the inflation rate would be higher.
124. The economy is in long–run equilibrium when Senator Soldout argues that the Fed should do
more to fight unemployment. He argues that if the Fed increased the money supply faster, more
workers would find jobs. The Senator’s argument
a. is completely correct.
b. is completely wrong.
c. is true for the short run but not the long run.
d. is true for the long run but not the short run
.
8570 The Short-Run Trade-off between Inflation and Unemployment
125. In the nineteenth century, some countries were on a gold standard so that on average the money
supply growth rate was close to zero and expected inflation was more or less constant. For these
countries during this time period, we find that increases in actual inflation were generally
associated with falling unemployment. These findings
a. are consistent with Friedman and Phelps’s theories, because they argued that when inflation
was higher than expected, unemployment would fall.
b. are consistent with Friedman and Phelps’s theories, because they argued that when prices
rose unemployment would fall whether actual inflation was higher than expected or not.
c. are inconsistent with Friedman and Phelps‘s theories, because they argued that higher inflation
would increase unemployment.
d. are inconsistent with Friedman and Phelps‘s theories, because they argued that inflation and
unemployment are unrelated.
126. Data for the United States traced out an almost perfect Phillips curve for much of the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
The Short-Run Trade-off between Inflation and Unemployment 8571
127. In the early 1970s, the short–run Phillips curve shifted
a. rightward as inflation expectations rose.
b. rightward as inflation expectations fell.
c. leftward as inflation expectations rose.
d. leftward as inflation expectations fell.
128. Moving from the late 1960s to 1970-1973,
a. inflation remained high while the unemployment rate was lower than in the late 1960s.
b. inflation remained high while the unemployment rate was higher than in the late 1960s.
c. inflation remained low while the unemployment rate was lower than in the late 1960s.
d. inflation remained low while the unemployment rate was higher than in the late 1960s.
8572 The Short-Run Trade-off between Inflation and Unemployment
129. By about 1973, U.S. policymakers had learned that
a. there is no trade-off between inflation and unemployment in the short run.
b. there is no trade–off between inflation and unemployment in the long run.
c. Friedman’s analysis of inflation and unemployment had been correct, and Phelps’s analysis of
inflation and unemployment had been incorrect.
d. Phelps’s analysis of inflation and unemployment had been correct, and Friedman’s analysis of
inflation and unemployment had been incorrect.
130. By about 1973, U.S. policymakers had learned that
a. Friedman and Phelps’s analysis of inflation and unemployment had been correct.
b. the short–run Phillips curve shifts when expectations of inflation change.
c. there is no long–run trade-off between inflation and unemployment.
d. All of the above are correct.
The Short-Run Trade-off between Inflation and Unemployment 8573
131. If an increase in inflation permanently reduced unemployment, then
a. money would not be neutral and the long–run Phillips curve would slope upward.
b. money would not be neutral and the long–run Phillips curve would slope downward.
c. money would be neutral and the long–run Phillips curve would slope upward.
d. money would be neutral and the long–run Phillips curve would slope downward.
132. An economist working for the Central Bank of Fredonia estimates a Phillips curve for Fredonia
and reports the following points on the estimated curve.
actual inflation rate
unemployment rate
5%
4%
4%
4.5%
3%
5%
2%
5.5%
Which of the following statements is correct?
a. These points are consistent with the theoretical long-run Phillips curve, but not with the short–
run Phillips curve.
b. These points are consistent with the theoretical short-run Phillips curve, but not with the long–
run Phillips curve.
c. These points are consistent with both the theoretical short–run and long–run Phillips curves.
d. These points are not consistent with either the theoretical short-run or long–run Phillips curves.
8574 The Short-Run Trade-off between Inflation and Unemployment
133. A politician blames the Federal Reserve for being “soft on unemployment” and claims that a
permanently higher money supply growth rate will lead to a permanent reduction in the
unemployment rate. The politician’s argument is
a. consistent with the long–run Phillips curve. Further, the long–run Phillips curve implies that
such a policy would not increase inflation.
b. consistent with the long-run Phillips curve. However, the long–run Phillips curve implies that
such a policy would increase inflation.
c. inconsistent with the long-run Phillips curve. However, the long–run Phillips curve implies that
such a policy would not increase inflation.
d. inconsistent with the long–run Phillips curve. Further, the long–run Phillips curve implies that
such a policy would increase inflation.
134. If a government redesigned its unemployment insurance programs so that the unemployed had
greater incentives to quickly find appropriate jobs, then which of the following curves would shift
right?
a. 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
The Short-Run Trade-off between Inflation and Unemployment 8575
135. Which of the following shifts the long–run Phillips curve left?
a. both an increase in the inflation rate and a decrease in the minimum wage rate
b. an increase in the inflation rate, but not a decrease in the minimum wage rate
c. a decrease in the minimum wage rate, but not an increase in the inflation rate
d. neither a decrease in the minimum wage rate nor an increase in the inflation rate
136. Which of the following implies that an increase in the money supply growth rate permanently
changes the unemployment rate?
a. both the long–run aggregate supply curve and the long–run Phillips curve
b. the long–run aggregate supply curve, but not the long–run Phillips curve
c. the long-run Phillips curve, but not the long-run aggregate supply curve
d. neither the long-run Phillips curve nor the long-run aggregate supply curve
8576 The Short-Run Trade-off between Inflation and Unemployment
137. If people correctly anticipate that inflation will fall by 1%, then
a. the short–run Phillips curve shifts right and unemployment is unchanged.
b. the short–run Phillips curve shifts right and unemployment rises.
c. the short–run Phillips curve shifts left and unemployment is unchanged.
d. the short-run Phillips curve would shift left and unemployment falls.
138. If people anticipate higher inflation, but inflation remains the same then
a. the short-run Phillips curve would shift right and unemployment would rise.
b. the short–run Phillips curve would shift right and unemployment would fall.
c. the short–run Phillips curve would shift left and unemployment would rise.
d. the short-run Phillips curve would shift left and unemployment would fall.
The Short-Run Trade-off between Inflation and Unemployment 8577
139. If the unemployment rate is below the natural rate, then
a. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve
will shift right.
b. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve
will shift left.
c. inflation is greater than expected. As inflation expectations are revised the short-run Phillips
curve will shift left.
d. inflation is greater than expected. As inflation expectations are revised the short-run Phillips
curve will shift right.
140. According to the long-run Phillips curve, in the long run monetary policy influences
a. inflation but not the unemployment rate; this is consistent with classical theory.
b. inflation but not the unemployment rate; this is inconsistent with classical theory.
c. the unemployment rate but not inflation; this is consistent with classical theory.
d. the unemployment rate but not inflation; this is inconsistent with classical theory.
8578 The Short-Run Trade-off between Inflation and Unemployment
141. Suppose the central bank decreases the growth rate of the money supply. In the short run, this
policy change will affect
a. both the unemployment rate and the inflation rate.
b. the unemployment rate but not the inflation rate.
c. the inflation rate but not the unemployment rate.
d. neither the inflation rate nor the unemployment rate.
142. Suppose the central bank increases the growth rate of the money supply. In the long run, which
of the following is unaffected by this change in policy?
a. the unemployment rate and the inflation rate
b. the unemployment rate but not the inflation rate
c. the inflation rate but not the unemployment rate
d. neither the inflation rate nor the unemployment rate
The Short-Run Trade-off between Inflation and Unemployment 8579
143. Consider two countries: Eastland and Westland. Eastland’s long-run Phillips curve sits further to
the right than does Westland’s long-run Phillips curve. Eastland and Westland are identical in all
other ways. In particular, they have the same money supply growth rates. In the long run,
compared to Westland, which of the following will we observe in Eastland?
a. higher unemployment and higher inflation.
b. higher unemployment and the same rate of inflation.
c. lower unemployment and higher inflation.
d. None of the above is correct.
144. Country A has a higher money supply growth rate and a long-run Phillips curve that is farther to
the left than country B’s. In the long run as compared to country B, country A will have
a. lower unemployment and higher inflation
b. higher unemployment and higher inflation
c. lower unemployment and lower inflation
d. None of the above is necessarily correct.
8580 The Short-Run Trade-off between Inflation and Unemployment
145. For many years country A has had a lower unemployment rate than country B. According to the
long–run Phillips curve which of the following could explain this? Country A has
a. maintained a higher money supply growth rate.
b. maintained a lower money supply growth rate.
c. a higher minimum wage than country B.
d. a lower minimum wage than country B.
146. Which of the following models imply that a decrease in the money supply reduces unemployment
temporarily but not permanently?
a. both the long-run Phillips curve and the aggregate supply and aggregate demand model.
b. the aggregate demand and aggregate supply model, but not the long–run Phillips curve.
c. the long-run Phillips curve, but not the aggregate demand and aggregate supply model.
d. neither the long-run Phillips curve nor the aggregate supply and aggregate demand model.
The Short-Run Trade-off between Inflation and Unemployment 8581
147. If inflation is less than expected, then the unemployment rate is
a. greater than the natural rate. In the long run the short-run Phillips curve will shift right.
b. greater than the natural rate. In the long run the short-run Phillips curve will shift left.
c. less than the natural rate. In the long run the short-run Phillips curve will shift right.
d. less than the natural rate. In the long run the short-run Phillips curve will shift left.
148. If inflation is greater than expected, then the unemployment rate is
a. above the natural rate. In the long run the short-run Phillips curve will shift right.
b. above the natural rate. In the long run the short-run Phillips curve will shift left.
c. below the natural rate. In the long run the short-run Phillips curve will shift right.
d. below the natural rate. In the long run the short-run Phillips curve will shift left.
8582 The Short-Run Trade-off between Inflation and Unemployment
149. If the central bank raises the rate at which it increases the money supply, then in the short run
unemployment is
a. above its natural rate. The short-run Phillips curve shifts right as the economy moves back to
its natural rate of unemployment.
b. above its natural rate. The long–run Phillips curve shifts left as the economy moves back to its
natural rate of unemployment.
c. below its natural rate. The short-run Phillips curve shifts right as the economy moves back to
its natural rate of unemployment.
d. below its natural rate. The long-run Phillips curve shifts left as the economy moves back to its
natural rate of unemployment.
150. If unemployment is above its natural rate, what happens to move the economy to long–run
equilibrium?
a. Inflation expectations rise which shifts the short-run Phillips curve to the right.
b. Inflation expectations rise which shifts the short-run Phillips curve to the left.
c. Inflation expectations fall which shifts the short-run Phillips curve to the right.
d. Inflation expectations fall which shifts the short–run Phillips curve to the left.
The Short-Run Trade-off between Inflation and Unemployment 8583
151. If unemployment is below its natural rate, what happens to move the economy to long–run
equilibrium?
a. Inflation expectations rise which shifts the short–run Phillips curve to the right.
b. Inflation expectations rise which shifts the short–run Phillips curve to the left.
c. Inflation expectations fall which shifts the short-run Phillips curve to the right.
d. Inflation expectations fall which shifts the short–run Phillips curve to the left.
152. Other things the same, in the long run a country that reduces the minimum wage from very high
levels will have
a. higher unemployment and lower inflation
b. lower unemployment and higher inflation
c. higher unemployment and the same level of inflation
d. lower unemployment and the same level of inflation
8584 The Short-Run Trade-off between Inflation and Unemployment
153. Prime Minister Emma Bigshot urges passage of a bill to reduce unemployment benefits from
very generous levels in her country. She also urges her country’s central bank to raise the rate at
which the money supply is increasing. In the long run which, if either, of these policies will
reduce the unemployment rate?
a. both reducing the generosity of unemployment benefits and raising the rate at which the money
supply is increasing
b. reducing the generosity of unemployment benefits but not raising the rate at which the money
supply is increasing
c. raising the rate at which the money supply is increasing, but not reducing the generosity of
unemployment benefits
d. neither reducing the generosity of unemployment benefits nor raising the rate at which the
money supply is increasing
154. The idea that the long–run Phillips curve is
a. vertical stems from the analysis of Samuelson and Solow.
b. vertical stems from the analysis of Friedman and Phelps.
c. vertical was disproved by the experiment that monetary and fiscal policymakers inadvertently
created in the 1970s.
d. downward-sloping can be correct if unemployment responds very quickly to unexpected
inflation.