Econ 20b Ch. 35
0.0(0)
Studied by 2 people
Learn
Practice Test
Spaced Repetition
Match
FlashcardsCard Sorting
1/121
Study Analytics
Name | Mastery | Learn | Test | Matching | Spaced |
|---|
No study sessions yet.
122 Terms
1
New cards
In which case, if any, will inflation not remain higher after a temporary adverse supply shock?
a.only if the central bank maintains a higher money supply growth rate
b.only if the central bank does nothing
c.both when the central bank maintains a higher money supply growth rate and when the central bank does nothing
d.Whether the central bank maintains a higher money supply growth rate or not, the inflation rate will return to its original level.
a.only if the central bank maintains a higher money supply growth rate
b.only if the central bank does nothing
c.both when the central bank maintains a higher money supply growth rate and when the central bank does nothing
d.Whether the central bank maintains a higher money supply growth rate or not, the inflation rate will return to its original level.
B
If people view the rise in inflation due to the adverse supply shock as a temporary aberration, expected inflation will not change and actual inflation will not remain higher, so long as the central bank does not change the money supply growth rate.
If people view the rise in inflation due to the adverse supply shock as a temporary aberration, expected inflation will not change and actual inflation will not remain higher, so long as the central bank does not change the money supply growth rate.
2
New cards
According to ________ macroeconomic theory, in the long run monetary growth affects nominal but not real variables.
a.Keynesian
b.nominal
c.classical
d.modern
a.Keynesian
b.nominal
c.classical
d.modern
C
Classical theory states that monetary growth does not affect real variables such as output and employment; it merely alters all prices and nominal incomes proportionately.
Classical theory states that monetary growth does not affect real variables such as output and employment; it merely alters all prices and nominal incomes proportionately.
3
New cards
An adverse supply shock
a.reduces unemployment and the inflation rate.
b.raises unemployment and reduces the inflation rate.
c.reduces unemployment and raises the inflation rate.
d.raises unemployment and the inflation rate.
a.reduces unemployment and the inflation rate.
b.raises unemployment and reduces the inflation rate.
c.reduces unemployment and raises the inflation rate.
d.raises unemployment and the inflation rate.
D
By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise, output to fall, and unemployment to rise.
By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise, output to fall, and unemployment to rise.
4
New cards
Unemployment would increase and prices would decrease if
a.aggregate supply shifts right.
b.aggregate demand shifts left.
c.aggregate demand shifts right.
d.aggregate supply shifts left
a.aggregate supply shifts right.
b.aggregate demand shifts left.
c.aggregate demand shifts right.
d.aggregate supply shifts left
B
Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
5
New cards
There is a temporary favorable 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 left.
b.reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.
c.raise 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 right.
a.raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.
b.reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.
c.raise 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 right.
B
If the central bank reduces the rate at which it increases the money supply, unemployment will rise closer to its previous rate. Prices will fall and, as expected inflation falls, the short-run Phillips curve shifts to the left.
If the central bank reduces the rate at which it increases the money supply, unemployment will rise closer to its previous rate. Prices will fall and, as expected inflation falls, the short-run Phillips curve shifts to the left.
6
New cards
If the response to an adverse supply shock leads to an increase in the money supply and a rise in inflation, the central bank is said to
a.accommodate the adverse supply shock.
b.aggregate the adverse supply shock.
c.appreciate the adverse supply shock.
d.average the adverse supply shock.
a.accommodate the adverse supply shock.
b.aggregate the adverse supply shock.
c.appreciate the adverse supply shock.
d.average the adverse supply shock.
A
Policymakers are said to accommodate an adverse supply shock when they respond to it by increasing aggregate demand, such as by increasing the money supply. As a result, inflation rises.
Policymakers are said to accommodate an adverse supply shock when they respond to it by increasing aggregate demand, such as by increasing the money supply. As a result, inflation rises.
7
New cards
A key to supporting the Friedman and Phelps hypothesis regarding the short-run and long-run relationships between inflation and unemployment was the role of ____
a.expected inflation.
b.frictional unemployment.
c.aggregate demand.
d.structural unemployment.
a.expected inflation.
b.frictional unemployment.
c.aggregate demand.
d.structural unemployment.
A
The short-run supply curve is upward-sloping due to the short-run impact of unexpected price changes. However, over time, people will expect changes in inflation that will shift the short-run aggregate-supply curve back to the long-run supply curve. Thus, expected inflation is the key to establishing the return to the natural rate of unemployment in the long run.
The short-run supply curve is upward-sloping due to the short-run impact of unexpected price changes. However, over time, people will expect changes in inflation that will shift the short-run aggregate-supply curve back to the long-run supply curve. Thus, expected inflation is the key to establishing the return to the natural rate of unemployment in the long run.
8
New cards
Which of the following is not associated with an adverse supply shock?
a.the short-run aggregate-supply curve shifts right
b.unemployment rises
c.the price level rises
d.output falls
a.the short-run aggregate-supply curve shifts right
b.unemployment rises
c.the price level rises
d.output falls
A
An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
9
New cards
If the government cuts government expenditures, then in the short run prices
a.rise and unemployment rises.
b.fall and unemployment falls.
c.rise and unemployment falls.
d.fall and unemployment rises.
a.rise and unemployment rises.
b.fall and unemployment falls.
c.rise and unemployment falls.
d.fall and unemployment rises.
D
A cut in government expenditures causes aggregate demand to shift to the left. Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
A cut in government expenditures causes aggregate demand to shift to the left. Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
10
New cards
A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift left.
True
False
True
False
True
A decrease in the growth rate of the money supply eventually causes expected inflation to fall. The short-run Phillips curve shifts left.
A decrease in the growth rate of the money supply eventually causes expected inflation to fall. The short-run Phillips curve shifts left.
11
New cards
Refer to the Figure. A significant worldwide drought could explain
a.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.
b.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.
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.
a.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.
b.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.
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.
C
An adverse supply shock like a worldwide drought shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
An adverse supply shock like a worldwide drought shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
12
New cards
The economy will move to a point on the short-run Phillips curve where unemployment is lower if
a.the Fed decreases the money supply.
b.the inflation rate increases.
c.the government cuts its expenditures.
d.the government raises taxes.
a.the Fed decreases the money supply.
b.the inflation rate increases.
c.the government cuts its expenditures.
d.the government raises taxes.
B
Shifts in aggregate demand push inflation and unemployment in opposite directions in the short run. On the Phillips curve, lower unemployment goes with higher inflation.
Shifts in aggregate demand push inflation and unemployment in opposite directions in the short run. On the Phillips curve, lower unemployment goes with higher inflation.
13
New cards
An increase in government expenditures serves as an example of an adverse supply shock.
True
False
True
False
False
An increase in government expenditures shifts the aggregate-demand curve not the aggregate-supply curve.
An increase in government expenditures shifts the aggregate-demand curve not the aggregate-supply curve.
14
New cards
Fiscal policy can be used to move the economy along the short-run Phillips curve.
True
False
True
False
True
Because fiscal policy can shift the aggregate-demand curve, it can move an economy along the short-run Phillips curve.
Because fiscal policy can shift the aggregate-demand curve, it can move an economy along the short-run Phillips curve.
15
New cards
The sacrifice ratio could be as small as zero according to proponents of
a.supply shock expectations theory.
b.zero expectations theory.
c.rational expectations theory.
d.rational sacrifice theory.
a.supply shock expectations theory.
b.zero expectations theory.
c.rational expectations theory.
d.rational sacrifice theory.
C
According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
16
New cards
A low sacrifice ratio would make a central bank more willing to reduce the inflation rate.
True
False
True
False
True
With a low sacrifice ratio, if the government made a credible commitment to a policy of low inflation, the economy would reach low inflation quickly without the cost of temporarily high unemployment and low output.
With a low sacrifice ratio, if the government made a credible commitment to a policy of low inflation, the economy would reach low inflation quickly without the cost of temporarily high unemployment and low output.
17
New cards
Which of the following is an example of an adverse supply shock?
a.a worldwide blight that damages grain crops
b.an increase in the money supply
c.a tax cut
d.decreased government spending
a.a worldwide blight that damages grain crops
b.an increase in the money supply
c.a tax cut
d.decreased government spending
A
An adverse supply shock is an event that directly raises firms' costs of production and thus the prices they charge. A worldwide blight raises food costs throughout many economies.
An adverse supply shock is an event that directly raises firms' costs of production and thus the prices they charge. A worldwide blight raises food costs throughout many economies.
18
New cards
If the unemployment rate is above the natural rate, then
a.inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
b.inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
c.inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right.
d.inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.
a.inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
b.inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left.
c.inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right.
d.inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.
B
A decrease in money supply, for example, shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left.
A decrease in money supply, for example, shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left.
19
New cards
Long-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.
True
False
True
False
False
In the long run, the economy is at the natural level of output. The trade-off between unemployment and inflation occurs in the short run.
In the long run, the economy is at the natural level of output. The trade-off between unemployment and inflation occurs in the short run.
20
New cards
According to the short-run Phillips curve, inflation
a.would rise and unemployment would fall if policymakers increased the money supply.
b.and unemployment would fall if the policymakers increased the money supply.
c.and unemployment would fall if the policymakers decreased the money supply.
d.would fall and unemployment would rise if policymakers increased the money supply.
a.would rise and unemployment would fall if policymakers increased the money supply.
b.and unemployment would fall if the policymakers increased the money supply.
c.and unemployment would fall if the policymakers decreased the money supply.
d.would fall and unemployment would rise if policymakers increased the money supply.
A
An increase in the money supply would shift the aggregate-demand curve right, which would cause inflation to rise and unemployment to fall.
An increase in the money supply would shift the aggregate-demand curve right, which would cause inflation to rise and unemployment to fall.
21
New cards
Unemployment is higher and inflation is lower as the aggregate-demand curve ________ a given aggregate supply curve.
a.shifts rightward along
b.stays fixed along
c.shifts leftward along
d.does not intersect
a.shifts rightward along
b.stays fixed along
c.shifts leftward along
d.does not intersect
C
A leftward shift of the aggregate-demand curve leads to higher unemployment and lower inflation.
A leftward shift of the aggregate-demand curve leads to higher unemployment and lower inflation.
22
New cards
If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities does not move closer to its pre-shock value as a result?
a.the price level but not output
b.both the price level and output
c.output but not the price level
d.neither output nor the price level
a.the price level but not output
b.both the price level and output
c.output but not the price level
d.neither output nor the price level
A
An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise. The price level moves even farther away from its pre-shock value.
An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise. The price level moves even farther away from its pre-shock value.
23
New cards
A rightward shift in short-run aggregate supply results from a(n)
a.adverse supply shock.
b.favorable demand shock.
c.adverse demand shock.
d.favorable supply shock.
a.adverse supply shock.
b.favorable demand shock.
c.adverse demand shock.
d.favorable supply shock.
D
A favorable supply shock lowers firms' costs of production and shifts the short-run aggregate-supply curve to the right.
A favorable supply shock lowers firms' costs of production and shifts the short-run aggregate-supply curve to the right.
24
New cards
The number of percentage points annual output falls for each percentage point reduction in inflation is the
a.sacrifice ratio.
b.stabilization ratio.
c.savings ratio.
d.scarcity ratio.
a.sacrifice ratio.
b.stabilization ratio.
c.savings ratio.
d.scarcity ratio.
A
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
25
New cards
A given short-run Phillips curve shows that a decrease in the inflation rate will be accompanied by a lower unemployment rate in the short run.
True
False
True
False
False
Phillips showed that years with low unemployment tend to have high inflation, and years with high unemployment tend to have low inflation.
Phillips showed that years with low unemployment tend to have high inflation, and years with high unemployment tend to have low inflation.
26
New cards
Slowing a car down is like ________, whereas putting the car into reverse gear is like ________.
a.disinflation; inflation
b.disinflation; deflation
c.deflation; disinflation
d.inflation; disinflation
a.disinflation; inflation
b.disinflation; deflation
c.deflation; disinflation
d.inflation; disinflation
B
Disinflation is a reduction in the rate of inflation, and is analogous to a car slowing down and reducing its rate of speed. Deflation, on the other hand, is a reduction in the price level and is analogous to a car going in reverse (with a rate of speed).
Disinflation is a reduction in the rate of inflation, and is analogous to a car slowing down and reducing its rate of speed. Deflation, on the other hand, is a reduction in the price level and is analogous to a car going in reverse (with a rate of speed).
27
New cards
Which of the following would we not expect if government policy moved the economy down along a given short-run Phillips curve?
a.Miguel makes smaller increases in the prices at his health food store.
b.Julie's nominal wage increase is smaller.
c.Teresa reads in the newspaper that the central bank recently decreased the money supply.
d.Jackie gets more job offers.
a.Miguel makes smaller increases in the prices at his health food store.
b.Julie's nominal wage increase is smaller.
c.Teresa reads in the newspaper that the central bank recently decreased the money supply.
d.Jackie gets more job offers.
D
A move down the short-run Phillips curve means lower inflation and higher unemployment. Jackie, therefore, would get fewer job offers, not more.
A move down the short-run Phillips curve means lower inflation and higher unemployment. Jackie, therefore, would get fewer job offers, not more.
28
New cards
Which of the following policies increases inflation and shifts the short-run Phillips curve right?
a.a decrease in the money supply growth rate
b.There is no relationship between the money supply growth rate and the short-run Phillips curve.
c.an increase in the money supply growth rate
d.a constant money supply growth rate
a.a decrease in the money supply growth rate
b.There is no relationship between the money supply growth rate and the short-run Phillips curve.
c.an increase in the money supply growth rate
d.a constant money supply growth rate
C
An increase in the money supply growth rate shifts the aggregate-demand curve to the right, unemployment falls below its natural rate, and actual inflation rises above expected inflation. In the long run, expected inflation rises, the short-run Phillips curve shifts to the right, and the economy ends up with higher inflation but the same level of unemployment.
An increase in the money supply growth rate shifts the aggregate-demand curve to the right, unemployment falls below its natural rate, and actual inflation rises above expected inflation. In the long run, expected inflation rises, the short-run Phillips curve shifts to the right, and the economy ends up with higher inflation but the same level of unemployment.
29
New cards
Monetary policy cannot change the natural rate of unemployment, but other government policies can. To which of the following curves does this statement apply?
a.short-run aggregate-supply
b.long-run Phillips
c.aggregate-demand
d.short-run Phillips
a.short-run aggregate-supply
b.long-run Phillips
c.aggregate-demand
d.short-run Phillips
B
Monetary policymakers face a long-run Phillips curve that is vertical, representing that the unemployment rate tends toward its normal level, called the natural rate of unemployment. Although monetary policy cannot influence the natural rate of unemployment, other types of government polices can.
Monetary policymakers face a long-run Phillips curve that is vertical, representing that the unemployment rate tends toward its normal level, called the natural rate of unemployment. Although monetary policy cannot influence the natural rate of unemployment, other types of government polices can.
30
New cards
Because people might adjust their expectations quickly if they found anti-inflation policy credible, the sacrifice ratio could be low according to proponents of
a.globalism.
b.rational expectations.
c.Keynesianism.
d.consumer choice.
a.globalism.
b.rational expectations.
c.Keynesianism.
d.consumer choice.
B
According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
31
New cards
According to the Phillips curve, unemployment and inflation are not related at all in
a.the short run, but not in the long run.
b.neither the long run nor the short run.
c.the short run and in the long run.
d.the long run, but not in the short run.
a.the short run, but not in the long run.
b.neither the long run nor the short run.
c.the short run and in the long run.
d.the long run, but not in the short run.
D
Milton Friedman and Edmund Phelps concluded that there is no reason to think that the rate of inflation would, in the long run, be related to the rate of unemployment.
Milton Friedman and Edmund Phelps concluded that there is no reason to think that the rate of inflation would, in the long run, be related to the rate of unemployment.
32
New cards
In the equation for the short-run Phillips curve, the parameter that measures how much actual unemployment responds to unexpected inflation is
a.u
b.a
c.y
d.x
a.u
b.a
c.y
d.x
B
The variable a is a parameter that measures how much unemployment responds to unexpected inflation.
The variable a is a parameter that measures how much unemployment responds to unexpected inflation.
33
New cards
In the short run, an adverse supply shock would cause the price level to
a.rise and output to fall.
b.rise and output to rise.
c.fall and output to fall.
d.fall and output to rise.
a.rise and output to fall.
b.rise and output to rise.
c.fall and output to fall.
d.fall and output to rise.
A
By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise and output to fall.
By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise and output to fall.
34
New cards
The Federal Reserve might move unemployment lower in the short run but not the long run by ________ the rate at which it increases the money supply.
a.increasing
b.There is no relationship between the rate at which the Federal Reserve increases the money supply and unemployment.
c.not changing
d.decreasing
a.increasing
b.There is no relationship between the rate at which the Federal Reserve increases the money supply and unemployment.
c.not changing
d.decreasing
A
Policymakers can pursue expansionary monetary policy to achieve lower unemployment for a while, but eventually unemployment returns to its natural rate.
Policymakers can pursue expansionary monetary policy to achieve lower unemployment for a while, but eventually unemployment returns to its natural rate.
35
New cards
When aggregate demand shifts leftward along the short-run aggregate-supply curve, inflation
a.increases and unemployment decreases.
b.decreases and unemployment increases.
c.increases and unemployment increases.
d.decreases and unemployment decreases.
a.increases and unemployment decreases.
b.decreases and unemployment increases.
c.increases and unemployment increases.
d.decreases and unemployment decreases.
B
Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
36
New cards
According to Friedman and Phelps, when actual inflation is less than expected inflation, the
a.unemployment rate is below the natural rate.
b.The actual inflation cannot ever be less than expected inflation.
c.unemployment rate is above the natural rate.
d.unemployment rate is equal to the natural rate.
a.unemployment rate is below the natural rate.
b.The actual inflation cannot ever be less than expected inflation.
c.unemployment rate is above the natural rate.
d.unemployment rate is equal to the natural rate.
C
If policymakers decrease aggregate demand, unemployment rises above its natural rate and the actual inflation rate falls below expected inflation.
If policymakers decrease aggregate demand, unemployment rises above its natural rate and the actual inflation rate falls below expected inflation.
37
New cards
Other things the same, a country that decides to increase inflation will
a.not have a lower unemployment rate in either the short run or the long run.
b.have a lower unemployment rate only in the short run.
c.have a lower unemployment rate in the short run and the long run.
d.have a lower unemployment rate only in the long run.
a.not have a lower unemployment rate in either the short run or the long run.
b.have a lower unemployment rate only in the short run.
c.have a lower unemployment rate in the short run and the long run.
d.have a lower unemployment rate only in the long run.
B
The short-run Phillips curve shows that higher inflation can lead to lower unemployment in the short run. But, as inflation expectations adjust in the long run, unemployment returns to the natural rate of unemployment.
The short-run Phillips curve shows that higher inflation can lead to lower unemployment in the short run. But, as inflation expectations adjust in the long run, unemployment returns to the natural rate of unemployment.
38
New cards
The long-run Phillips curve would shift to the right if
a.the money supply growth rate increased, but not if effective job-training programs were eliminated.
b.effective job-training programs were implemented, but not if the money supply growth rate increased.
c.the money supply growth rate increased or if effective job-training programs were implemented.
d.effective job-training programs were eliminated, but not if the money supply growth rate increased.
a.the money supply growth rate increased, but not if effective job-training programs were eliminated.
b.effective job-training programs were implemented, but not if the money supply growth rate increased.
c.the money supply growth rate increased or if effective job-training programs were implemented.
d.effective job-training programs were eliminated, but not if the money supply growth rate increased.
D
To shift the long-run Phillips curve, policymakers should look to policies that change the functioning of the labor market. Eliminating effective job-training programs would increase the natural rate of unemployment and shift the long-run Phillips curve to the right. Monetary policy does not shift the long-run Phillips curve.
To shift the long-run Phillips curve, policymakers should look to policies that change the functioning of the labor market. Eliminating effective job-training programs would increase the natural rate of unemployment and shift the long-run Phillips curve to the right. Monetary policy does not shift the long-run Phillips curve.
39
New cards
If there is a decrease in the price of oil, then
a.unemployment rises. If the central bank tries to counter this increase, inflation falls.
b.unemployment rises. If the central bank tries to counter this increase, inflation rises.
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.
a.unemployment rises. If the central bank tries to counter this increase, inflation falls.
b.unemployment rises. If the central bank tries to counter this increase, inflation rises.
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.
C
A decrease in the price of oil is a favorable supply shock that causes unemployment to fall and inflation to rise. If the central bank tries to counter the decrease in unemployment, inflation will fall.
A decrease in the price of oil is a favorable supply shock that causes unemployment to fall and inflation to rise. If the central bank tries to counter the decrease in unemployment, inflation will fall.
40
New cards
An increase in inflation expectations shifts the short-run Phillips curve right while the long-run Phillips curve
a.is not affected.
b.shifts to the right.
c.shifts to the left.
d.shifts to the right and then shifts back to the left.
a.is not affected.
b.shifts to the right.
c.shifts to the left.
d.shifts to the right and then shifts back to the left.
A
Changes in inflation expectations have no effect on the long-run Phillips curve.
Changes in inflation expectations have no effect on the long-run Phillips curve.
41
New cards
In the long run, a decrease in the money supply
a.lowers prices and leaves unemployment unchanged.
b.leaves prices unchanged and raises unemployment.
c.leaves prices and unemployment unchanged.
d.raises prices and leaves unemployment unchanged.
a.lowers prices and leaves unemployment unchanged.
b.leaves prices unchanged and raises unemployment.
c.leaves prices and unemployment unchanged.
d.raises prices and leaves unemployment unchanged.
A
A decrease in money supply shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left, and the economy ends up with lower inflation but the same level of unemployment.
A decrease in money supply shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left, and the economy ends up with lower inflation but the same level of unemployment.
42
New cards
Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is
a.12.
b.3.
c.5.
d.2.
a.12.
b.3.
c.5.
d.2.
B
Output falls by 6 percent; inflation falls by 2 percentage points. The sacrifice ratio is 6 divided by 2, which is equal to 3.
Output falls by 6 percent; inflation falls by 2 percentage points. The sacrifice ratio is 6 divided by 2, which is equal to 3.
43
New cards
Over the course of 2 years, if a central bank reduced inflation by 4 percentage points and that made output fall by 2 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is
a.2
b.1
c.4
d.3
a.2
b.1
c.4
d.3
B
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 2 percent per year; the sacrifice ratio is 2 divided by 2, which is equal to 1.
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 2 percent per year; the sacrifice ratio is 2 divided by 2, which is equal to 1.
44
New cards
If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products, then a decrease in the money supply growth rate would have at most a very short-lived effect on unemployment.
True
False
True
False
True
Under the conditions described, the economy quickly back to the natural rate of unemployment after a decrease in the money supply growth rate.
Under the conditions described, the economy quickly back to the natural rate of unemployment after a decrease in the money supply growth rate.
45
New cards
The central bank would decrease the money supply to counter rising output in response to a(n)
a.adverse demand shock.
b.favorable demand shock.
c.favorable supply shock.
d.adverse supply shock.
a.adverse demand shock.
b.favorable demand shock.
c.favorable supply shock.
d.adverse supply shock.
C
Having the opposite effect to an adverse supply shock, a favorable supply shock shifts the economy's short-run aggregate-supply curve right and the short-run Phillips curve left. Output rises, unemployment falls, and prices fall. If the central bank had reasons to counter these changes, they would decrease the money supply.
Having the opposite effect to an adverse supply shock, a favorable supply shock shifts the economy's short-run aggregate-supply curve right and the short-run Phillips curve left. Output rises, unemployment falls, and prices fall. If the central bank had reasons to counter these changes, they would decrease the money supply.
46
New cards
If a central bank reduces inflation 2 percentage points and this makes output fall 5 percentage points and unemployment rise 3 percentage points for one year, the sacrifice ratio is
a.2/3.
b.2/5.
c.3/2.
d.5/2.
a.2/3.
b.2/5.
c.3/2.
d.5/2.
D
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 5 percent and inflation fell by 2 percent; the sacrifice ratio is 5 divided by 2.
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 5 percent and inflation fell by 2 percent; the sacrifice ratio is 5 divided by 2.
47
New cards
The long-run Phillips curve is not consistent with monetary neutrality implied by the classical dichotomy.
True
False
True
False
False
The vertical long-run Phillips curve is one expression of the classical idea of monetary neutrality.
The vertical long-run Phillips curve is one expression of the classical idea of monetary neutrality.
48
New cards
Which of the following scenarios is consistent with typical estimates of the sacrifice ratio?
a.Inflation is reduced from 7 percent to 4 percent, and annual output falls by 8 percent.
b.Inflation is reduced from 3 percent to 2 percent, and annual output falls by 3 percent.
c.Inflation is reduced from 4 percent to 1 percent, and annual output falls by 10 percent.
d.Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent.
a.Inflation is reduced from 7 percent to 4 percent, and annual output falls by 8 percent.
b.Inflation is reduced from 3 percent to 2 percent, and annual output falls by 3 percent.
c.Inflation is reduced from 4 percent to 1 percent, and annual output falls by 10 percent.
d.Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent.
D
The typical estimate sacrifice ratio is 5.
The typical estimate sacrifice ratio is 5.
49
New cards
According to the Phillips curve, if policymakers contract aggregate demand, they can ________ inflation and ________ unemployment.
a.raise; raise
b.reduce; raise
c.reduce; reduce
d.raise; reduce
a.raise; raise
b.reduce; raise
c.reduce; reduce
d.raise; reduce
B
Contractions of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
Contractions of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
50
New cards
Prime Minister Emma Bigshot urges passage of a bill to increase unemployment benefits to 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 increase the unemployment rate?
a.raising the rate at which the money supply is increasing, but not increasing the generosity of unemployment benefits
b.increasing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing
c.both increasing the generosity of unemployment benefits and raising the rate at which the money supply is increasing
d.neither increasing the generosity of unemployment benefits nor raising the rate at which the money supply is increasing
a.raising the rate at which the money supply is increasing, but not increasing the generosity of unemployment benefits
b.increasing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing
c.both increasing the generosity of unemployment benefits and raising the rate at which the money supply is increasing
d.neither increasing the generosity of unemployment benefits nor raising the rate at which the money supply is increasing
B
Increasing unemployment benefits would increase the long-run natural rate of unemployment. Monetary policy has no effect on the natural rate of unemployment.
Increasing unemployment benefits would increase the long-run natural rate of unemployment. Monetary policy has no effect on the natural rate of unemployment.
51
New cards
In the long run, which of the following would shift the long-run Phillips curve to the left?
a.an increase in right-to-work laws that limit collective bargaining
b.a decrease in the money supply
c.an increase in the minimum wage
d.an increase in the money supply
a.an increase in right-to-work laws that limit collective bargaining
b.a decrease in the money supply
c.an increase in the minimum wage
d.an increase in the money supply
A
To reduce the natural rate of unemployment and shift the long-run Phillips curve to the left, policymakers should look to policies that improve the functioning of the labor market, such as right-to-work laws that limit collective bargaining.
To reduce the natural rate of unemployment and shift the long-run Phillips curve to the left, policymakers should look to policies that improve the functioning of the labor market, such as right-to-work laws that limit collective bargaining.
52
New cards
Suppose that the money supply increases. In the short run, this increases prices according to
a.the short-run Phillips curve but not according to the aggregate demand and aggregate supply model.
b.the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.
c.both the short-run Phillips curve and the aggregate demand and aggregate supply model.
d.neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
a.the short-run Phillips curve but not according to the aggregate demand and aggregate supply model.
b.the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.
c.both the short-run Phillips curve and the aggregate demand and aggregate supply model.
d.neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
C
An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand move the economy to a point on the Phillips curve with higher inflation. The aggregate demand and aggregate supply model produces a similar result.
An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand move the economy to a point on the Phillips curve with higher inflation. The aggregate demand and aggregate supply model produces a similar result.
53
New cards
If money were not neutral and the long-run Phillips curve sloped downward, then
a.an increase in inflation would permanently increase unemployment.
b.an increase in inflation would permanently have no effect on unemployment.
c.an increase in inflation would permanently reduce unemployment.
d.a decrease in inflation would permanently reduce unemployment.
a.an increase in inflation would permanently increase unemployment.
b.an increase in inflation would permanently have no effect on unemployment.
c.an increase in inflation would permanently reduce unemployment.
d.a decrease in inflation would permanently reduce unemployment.
C
If the long-run Phillips curve sloped downward, an increase in inflation would permanently reduce unemployment. Inflation and unemployment would have a permanent negative correlation.
If the long-run Phillips curve sloped downward, an increase in inflation would permanently reduce unemployment. Inflation and unemployment would have a permanent negative correlation.
54
New cards
The proliferation of Internet usage serves as an example of an adverse supply shock.
True
False
True
False
False
The proliferation of Internet usage reduces firms' costs and prices and is, therefore, a favorable supply shock.
The proliferation of Internet usage reduces firms' costs and prices and is, therefore, a favorable supply shock.
55
New cards
Which of the following would not tend to shorten recessions associated with anti-inflation policies by central banks?
a.The long-run Phillips curve shifts to the right.
b.The short-run Phillips curve shifts rapidly.
c.People adjust their expectations of inflation rapidly.
d.People believe policy announcements made by central bank officials.
a.The long-run Phillips curve shifts to the right.
b.The short-run Phillips curve shifts rapidly.
c.People adjust their expectations of inflation rapidly.
d.People believe policy announcements made by central bank officials.
A
Monetary policy does not shift the long-run Phillips curve. Even if a central bank could shift the curve, a shift to the right would mean higher unemployment.
Monetary policy does not shift the long-run Phillips curve. Even if a central bank could shift the curve, a shift to the right would mean higher unemployment.
56
New cards
If the sacrifice ratio is 2, reducing the inflation rate from 3 percent to 1 percent would
a.imply that unemployment would rise by 1%.
b.imply that unemployment would rise by 4%.
c.cost 1 percent of annual output.
d.cost 4 percent of annual output.
a.imply that unemployment would rise by 1%.
b.imply that unemployment would rise by 4%.
c.cost 1 percent of annual output.
d.cost 4 percent of annual output.
D
Inflation falls by 2 percent. With a sacrifice ratio of 2, output would fall by 4 percent.
Inflation falls by 2 percent. With a sacrifice ratio of 2, output would fall by 4 percent.
57
New cards
A decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left.
True
False
True
False
True
On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Therefore, a decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left.
On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Therefore, a decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left.
58
New cards
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 Eastland, which of the following will we observe in Westland?
a.higher unemployment and the same rate of inflation
b.lower unemployment and the same rate of inflation
c.higher unemployment and higher inflation
d.lower unemployment and higher inflation
a.higher unemployment and the same rate of inflation
b.lower unemployment and the same rate of inflation
c.higher unemployment and higher inflation
d.lower unemployment and higher inflation
B
On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Because Westland's long-run Phillips curve is to the left of Eastland's, Westland has lower unemployment. Because both countries have the same money supply growth rates, their inflation rates are the same.
On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Because Westland's long-run Phillips curve is to the left of Eastland's, Westland has lower unemployment. Because both countries have the same money supply growth rates, their inflation rates are the same.
59
New cards
Which of the following would shift the long-run Phillips curve left?
a.an increase in the natural rate of unemployment
b.a decrease in job-training programs
c.a decrease in the natural rate of unemployment
d.an increase in the minimum wage
a.an increase in the natural rate of unemployment
b.a decrease in job-training programs
c.a decrease in the natural rate of unemployment
d.an increase in the minimum wage
C
A policy change that reduced the natural rate of unemployment would shift the long-run Phillips curve to the left.
A policy change that reduced the natural rate of unemployment would shift the long-run Phillips curve to the left.
60
New cards
Which of the following would cause a move to the right along the short-run Phillips curve?
a.The federal government uses labor-market policies to increase the natural rate of unemployment.
b.The central bank pursues an unexpectedly tight monetary policy.
c.The central bank pursues an unexpectedly easy monetary policy.
d.The federal government uses labor-market policies to decrease the natural rate of unemployment.
a.The federal government uses labor-market policies to increase the natural rate of unemployment.
b.The central bank pursues an unexpectedly tight monetary policy.
c.The central bank pursues an unexpectedly easy monetary policy.
d.The federal government uses labor-market policies to decrease the natural rate of unemployment.
B
When the money supply tightens, the aggregate-demand curve shifts to the left and the economy moves along a given short-run aggregate-supply curve to a new equilibrium with lower output, higher unemployment, and lower inflation. This new short-run equilibrium can be represented a move to the right along a the short-run Phillips curve.
When the money supply tightens, the aggregate-demand curve shifts to the left and the economy moves along a given short-run aggregate-supply curve to a new equilibrium with lower output, higher unemployment, and lower inflation. This new short-run equilibrium can be represented a move to the right along a the short-run Phillips curve.
61
New cards
If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should
a.increase the money supply growth rate which reduces the unemployment rate.
b.increase the money supply growth rate which raises the unemployment rate.
c.decrease the money supply growth rate which raises the unemployment rate.
d.decrease the money supply growth rate which reduces the unemployment rate.
a.increase the money supply growth rate which reduces the unemployment rate.
b.increase the money supply growth rate which raises the unemployment rate.
c.decrease the money supply growth rate which raises the unemployment rate.
d.decrease the money supply growth rate which reduces the unemployment rate.
C
A decrease in the money supply growth rate shifts aggregate demand to the left and raises the unemployment rate even higher.
A decrease in the money supply growth rate shifts aggregate demand to the left and raises the unemployment rate even higher.
62
New cards
If output rises and unemployment falls, the central bank must have done what to the money supply?
a.decreased by less than a factor of two
b.made no change
c.decreased by more than a factor of five
d.increased
a.decreased by less than a factor of two
b.made no change
c.decreased by more than a factor of five
d.increased
D
An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand cause output to rise and move the economy to a point on the Phillips curve with lower unemployment.
An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand cause output to rise and move the economy to a point on the Phillips curve with lower unemployment.
63
New cards
A reduction in the rate of inflation is
a.reinflation.
b.exflation.
c.disinflation.
d.deflation.
a.reinflation.
b.exflation.
c.disinflation.
d.deflation.
C
The inflation rate is percentage change in the prices level in an economy. When the inflation rate is positive, like 3%, this means the price level in the economy is rising. When the inflation rate declines, from 3% to 1% for example, this is known as disinflation. This should not be confused with deflation, which refers to a situation where there is a negative inflation rate and prices are declining.
The inflation rate is percentage change in the prices level in an economy. When the inflation rate is positive, like 3%, this means the price level in the economy is rising. When the inflation rate declines, from 3% to 1% for example, this is known as disinflation. This should not be confused with deflation, which refers to a situation where there is a negative inflation rate and prices are declining.
64
New cards
If there is an adverse supply shock and the Federal Reserve takes action that raises inflation but lowers unemployment in the short run, the action must have been
a.a small decrease in the growth rate of the money supply.
b.no change in the growth rate of the money supply.
c.a substantial decrease in the growth rate of the money supply.
d.an increase in the growth rate of the money supply.
a.a small decrease in the growth rate of the money supply.
b.no change in the growth rate of the money supply.
c.a substantial decrease in the growth rate of the money supply.
d.an increase in the growth rate of the money supply.
D
An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise.
An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise.
65
New cards
Which of the following is correct?
a.Events that shift the long-run Phillips curve right also shift the long-run aggregate-supply curve right.
b.The decrease in output associated with reducing inflation is more if the policy change is announced ahead of time and is credible.
c.Unemployment can be changed by the use of government policy, but other sources of change are possible.
d.In the long run, policymakers face a trade off between inflation and unemployment.
a.Events that shift the long-run Phillips curve right also shift the long-run aggregate-supply curve right.
b.The decrease in output associated with reducing inflation is more if the policy change is announced ahead of time and is credible.
c.Unemployment can be changed by the use of government policy, but other sources of change are possible.
d.In the long run, policymakers face a trade off between inflation and unemployment.
C
Government policy, such as changes in monetary policy and minimum-wage laws, can change unemployment in the short run. But other sources, such as fundamental changes in labor markets, can change the natural rate of unemployment in the long run.
Government policy, such as changes in monetary policy and minimum-wage laws, can change unemployment in the short run. But other sources, such as fundamental changes in labor markets, can change the natural rate of unemployment in the long run.
66
New cards
The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right when there is a(n)
a.adverse supply shock.
b.favorable supply shock.
c.adverse demand shock.
d.favorable demand shock.
a.adverse supply shock.
b.favorable supply shock.
c.adverse demand shock.
d.favorable demand shock.
A
An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
67
New cards
If inflation expectations fall, the short-run Phillips curve shifts
a.right. If inflation remains the same, unemployment falls.
b.right. If inflation remains the same, unemployment rises.
c.left. If inflation remains the same, unemployment falls.
d.left. If inflation remains the same, unemployment rises.
a.right. If inflation remains the same, unemployment falls.
b.right. If inflation remains the same, unemployment rises.
c.left. If inflation remains the same, unemployment falls.
d.left. If inflation remains the same, unemployment rises.
C
The short-run Phillips curve shifts left when inflation expectations fall. For every possible inflation rate, unemployment would be lower.
The short-run Phillips curve shifts left when inflation expectations fall. For every possible inflation rate, unemployment would be lower.
68
New cards
Samuelson and Solow argued that there is downward pressure on wages and prices when unemployment is
a.high.
b.constant.
c.low.
d.unmeasurable.
a.high.
b.constant.
c.low.
d.unmeasurable.
A
Samuelson and Solow reasoned that low unemployment was associated with high aggregate demand, which in turn put upward pressure on wages and prices throughout the economy. High unemployment had the opposite effect, they put downward pressure on wages and prices.
Samuelson and Solow reasoned that low unemployment was associated with high aggregate demand, which in turn put upward pressure on wages and prices throughout the economy. High unemployment had the opposite effect, they put downward pressure on wages and prices.
69
New cards
Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally bad conditions for growing crops. The bad weather would
a.shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right.
b.shift both the short-run aggregate-supply and the short-run Phillips curves right.
c.shift both the short-run aggregate-supply and the short-run Phillips curves left.
d.shift the short-run aggregate-supply curve to the right, and the short-run Phillips curve to the left.
a.shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right.
b.shift both the short-run aggregate-supply and the short-run Phillips curves right.
c.shift both the short-run aggregate-supply and the short-run Phillips curves left.
d.shift the short-run aggregate-supply curve to the right, and the short-run Phillips curve to the left.
A
An adverse supply shock like bad weather shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
An adverse supply shock like bad weather shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
70
New cards
Over the course of 2 years, if the central bank reduced inflation by 1 percentage point and that made output fall by 2 percentage points each year and the unemployment rate rise from 3 percent to 5 percent, the sacrifice ratio is
a.4
b.5
c.2
d.3
a.4
b.5
c.2
d.3
A
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 0.5 percent per year; the sacrifice ratio is 2 divided by 0.5, which is equal to 4.
The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 0.5 percent per year; the sacrifice ratio is 2 divided by 0.5, which is equal to 4.
71
New cards
If expected inflation decreases, which of the following shifts right?
a.neither the long-run nor the short-run Phillips curve
b.the long-run but not the short-run Phillips curve
c.both the short-run and the long-run Phillips curves
d.the short-run but not the long-run Phillips curve
a.neither the long-run nor the short-run Phillips curve
b.the long-run but not the short-run Phillips curve
c.both the short-run and the long-run Phillips curves
d.the short-run but not the long-run Phillips curve
A
When expected inflation falls, firms and workers start taking lower inflation into account when setting wages and prices. The short-run Phillips curve then shifts to the left, not the right. The long-run Phillips curve does not respond to expected inflation.
When expected inflation falls, firms and workers start taking lower inflation into account when setting wages and prices. The short-run Phillips curve then shifts to the left, not the right. The long-run Phillips curve does not respond to expected inflation.
72
New cards
According to the theory of rational expectations, people ____
a.optimally use all the information they have when forecasting the future.
b.use the previous time period to forecast the future.
c.use some, but not all, of the available information.
d.use an adaptive strategy.
a.optimally use all the information they have when forecasting the future.
b.use the previous time period to forecast the future.
c.use some, but not all, of the available information.
d.use an adaptive strategy.
A
Rational expectations is the theory that people optimally use all of the information they have, including information about government policies, when forecasting the future.
Rational expectations is the theory that people optimally use all of the information they have, including information about government policies, when forecasting the future.
73
New cards
It is unanticipated inflation, not inflation per se, that causes
a.the long-run Phillips curve to shift to the left.
b.a change in the natural rate of unemployment.
c.the shape of the long-run aggregate supply curve.
d.the change in unemployment associated with a change in inflation.
a.the long-run Phillips curve to shift to the left.
b.a change in the natural rate of unemployment.
c.the shape of the long-run aggregate supply curve.
d.the change in unemployment associated with a change in inflation.
D
Because of rational expectations, anticipated inflation causes the short-run Phillips curve to shift and return the economy quickly to the natural rate of unemployment. It is unanticipated inflation that causes the change in unemployment.
Because of rational expectations, anticipated inflation causes the short-run Phillips curve to shift and return the economy quickly to the natural rate of unemployment. It is unanticipated inflation that causes the change in unemployment.
74
New cards
According to the theory of liquidity preference, which of the following is NOT true?
a. If the interest rate is below the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created.
b. If the interest rate is above the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created.
c. The supply of money depends on the interest rate.
d. The demand for money is represented by a downward-sloping line on a supply-and-demand graph.
a. If the interest rate is below the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created.
b. If the interest rate is above the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created.
c. The supply of money depends on the interest rate.
d. The demand for money is represented by a downward-sloping line on a supply-and-demand graph.
C
Because the quantity of money supplied is fixed by Fed policy, it does not depend on the interest rate. However, the demand for money is represented by a downward-sloping line. According to the theory of liquidity preference, the interest rate adjusts to bring the quantity of money supplied and the quantity of money demanded into balance. If the interest rate is above the equilibrium level, the quantity of money people want to hold is less than the quantity the Fed has created, and vice versa.
Because the quantity of money supplied is fixed by Fed policy, it does not depend on the interest rate. However, the demand for money is represented by a downward-sloping line. According to the theory of liquidity preference, the interest rate adjusts to bring the quantity of money supplied and the quantity of money demanded into balance. If the interest rate is above the equilibrium level, the quantity of money people want to hold is less than the quantity the Fed has created, and vice versa.
75
New cards
Which of the following does fiscal policy not primarily affect in the long run?
a. saving
b. investment
c. aggregate demand
d. growth
a. saving
b. investment
c. aggregate demand
d. growth
C
In the long-run, fiscal policy influences saving, investment, and growth. In the short run, it affects primarily aggregate demand.
In the long-run, fiscal policy influences saving, investment, and growth. In the short run, it affects primarily aggregate demand.
76
New cards
The theory of liquidity preference only attempts to explain the nominal interest rate.
True
False
True
False
False
The nominal interest rate is the interest rate as usually reported, and the real interest rate is the interest rate corrected for the effects of inflation. The theory of liquidity preference is trying to explain both interest rates by assuming that expected inflation is held constant.
The nominal interest rate is the interest rate as usually reported, and the real interest rate is the interest rate corrected for the effects of inflation. The theory of liquidity preference is trying to explain both interest rates by assuming that expected inflation is held constant.
77
New cards
The Federal Funds Rate is the interest rate the Fed charges depository institutions for short-term loans.
True
False
True
False
False
The Federal Funds rate is the interest rate banks charge each other for short-term loans. The discount rate is the interest rate on the loans that the Fed makes to banks.
The Federal Funds rate is the interest rate banks charge each other for short-term loans. The discount rate is the interest rate on the loans that the Fed makes to banks.
78
New cards
During periods of expansion, automatic stabilizers cause government expenditures to rise and taxes to fall.
True
False
True
False
False
Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Some examples of automatic stabilizers include the unemployment compensation system, the federal income tax, and the welfare system.
Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Some examples of automatic stabilizers include the unemployment compensation system, the federal income tax, and the welfare system.
79
New cards
Which of the following is an example of an increase in government purchases?
a. The government builds new bridges.
b. The Federal Reserve sells government bonds.
c. The government decreases Social Security payments.
d. The government increases corporate taxes.
a. The government builds new bridges.
b. The Federal Reserve sells government bonds.
c. The government decreases Social Security payments.
d. The government increases corporate taxes.
A
Fiscal policy refers to the government's choices regarding the overall level of government purchases and taxes. When the government builds new bridges, this is an example of an increase in government purchases. However, when the Federal Reserve sells government bonds, this is an example of a monetary policy.
Fiscal policy refers to the government's choices regarding the overall level of government purchases and taxes. When the government builds new bridges, this is an example of an increase in government purchases. However, when the Federal Reserve sells government bonds, this is an example of a monetary policy.
80
New cards
Which of the following policy actions does NOT shift the aggregate-demand curve?
a. open-market operations by the Fed
b. a decrease in taxes
c. a change in the price level
d. an increase in government spending
a. open-market operations by the Fed
b. a decrease in taxes
c. a change in the price level
d. an increase in government spending
C
Fiscal policy such as a decrease in taxes or an increase in government spending shifts the aggregate-demand curve. Similarly, monetary policy such as the Fed conducting open-market operations also shifts the aggregate-demand curve. Because the aggregate demand curve represents the relationship between the price level and the quantity of output, a change in the price level causes a movement along the aggregate-demand curve.
Fiscal policy such as a decrease in taxes or an increase in government spending shifts the aggregate-demand curve. Similarly, monetary policy such as the Fed conducting open-market operations also shifts the aggregate-demand curve. Because the aggregate demand curve represents the relationship between the price level and the quantity of output, a change in the price level causes a movement along the aggregate-demand curve.
81
New cards
Which of the following is true about the interest-rate effect?
a. It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
b. It depends on the idea that increases in interest rates increase the quantity of goods and services demanded.
c. It states that the interest rate is unrelated to the quantity of goods and services demanded.
d. It does not explain the slope of the aggregate-demand curve.
a. It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
b. It depends on the idea that increases in interest rates increase the quantity of goods and services demanded.
c. It states that the interest rate is unrelated to the quantity of goods and services demanded.
d. It does not explain the slope of the aggregate-demand curve.
A
The interest-rate effect depends on the idea that decreases in interest rate increase the quantity of goods and services demanded. Of the three reasons why the aggregate-demand curve slopes downward (the wealth effect, the interest-rate effect, and the exchange-rate effect), the interest-rate effect is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
The interest-rate effect depends on the idea that decreases in interest rate increase the quantity of goods and services demanded. Of the three reasons why the aggregate-demand curve slopes downward (the wealth effect, the interest-rate effect, and the exchange-rate effect), the interest-rate effect is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
82
New cards
If the multiplier is 5, then the MPC is
a. 0.2
b. 0.8
c. 10
d. 2
a. 0.2
b. 0.8
c. 10
d. 2
B
The multiplier for changes in government spending is calculated as 1/(1 - MPC). Rearranging this equation yields MPC = 1 - (1/Multiplier). Therefore, if the multiplier is 5, then the MPC is 1- (1/5) = 0.8.
The multiplier for changes in government spending is calculated as 1/(1 - MPC). Rearranging this equation yields MPC = 1 - (1/Multiplier). Therefore, if the multiplier is 5, then the MPC is 1- (1/5) = 0.8.
83
New cards
Which of the following events would cause the Fed to stabilize output through increasing the money supply?
a. a decrease in interest rates
b. an increase in government spending
c. an increase in taxes
d. an increase in net exports
a. a decrease in interest rates
b. an increase in government spending
c. an increase in taxes
d. an increase in net exports
C
An increase in the money supply by the Fed would cause interest rates to decline. Because the interest rate is the cost of borrowing, the fall in the interest rate raises the quantity of goods and services demanded, which would increase the equilibrium level of output in an economy. This means that the event that would cause the Fed to stabilize in this way must cause output to fall. An increase in net exports, an increase in government spending, and a decrease in interest rates all cause aggregate demand to rise, whereas an increase in taxes causes aggregate demand to decline.
An increase in the money supply by the Fed would cause interest rates to decline. Because the interest rate is the cost of borrowing, the fall in the interest rate raises the quantity of goods and services demanded, which would increase the equilibrium level of output in an economy. This means that the event that would cause the Fed to stabilize in this way must cause output to fall. An increase in net exports, an increase in government spending, and a decrease in interest rates all cause aggregate demand to rise, whereas an increase in taxes causes aggregate demand to decline.
84
New cards
Which of the following events would cause the Fed to stabilize output through decreasing the money supply?
a. an increase in interest rates
b. a decrease in government spending
c. an increase in taxes
d. an increase in net exports
a. an increase in interest rates
b. a decrease in government spending
c. an increase in taxes
d. an increase in net exports
85
New cards
According to liquidity preference theory, the money-supply curve would shift if the Fed engaged in open-market operations.
True
False
True
False
True
According to liquidity preference theory, the Fed controls the money supply directly. Therefore, in order to shift the money-supply curve, the Fed would need to engage in open-market operations such as buying or selling bonds.
According to liquidity preference theory, the Fed controls the money supply directly. Therefore, in order to shift the money-supply curve, the Fed would need to engage in open-market operations such as buying or selling bonds.
86
New cards
The multiplier for changes in government spending is calculated as
a. 1/(1 - MPC).
b. 1 - MPC.
c. 1/(1 + MPC).
d. MPC/(1 - MPC).
a. 1/(1 - MPC).
b. 1 - MPC.
c. 1/(1 + MPC).
d. MPC/(1 - MPC).
A
The impact on aggregate demand of a change in government purchases is the equivalent to the infinite sum 1 + MPC + MPC2 + MPC3 + … Using the formula for an infinite geometric series, this means that the multiplier is equal to 1/(1 - MPC).
The impact on aggregate demand of a change in government purchases is the equivalent to the infinite sum 1 + MPC + MPC2 + MPC3 + … Using the formula for an infinite geometric series, this means that the multiplier is equal to 1/(1 - MPC).
87
New cards
Take the following information as given for small, imaginary economy:
When income is $10,000, consumption spending is $6,500.
When income is $11,000, consumption spending is $7,100.
Refer to the scenario. For this economy, an initial increase of $200 in net exports translates into a _________ increase in aggregate demand in the absence of the crowding-out effect.
a. $500
b. $1,000
c. $800
d. $120
When income is $10,000, consumption spending is $6,500.
When income is $11,000, consumption spending is $7,100.
Refer to the scenario. For this economy, an initial increase of $200 in net exports translates into a _________ increase in aggregate demand in the absence of the crowding-out effect.
a. $500
b. $1,000
c. $800
d. $120
A
The spending multiplier is calculated as 1/(1 - MPC). The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600, so the MPC = 0.60. This means the multiplier is 1/(1 – 0.60) = 1/(0.40) = 2.5. Therefore, a $200 increase in net exports translates into a $200 x 2.5 = $500 increase in aggregate demand in the absence of the crowding-out effect.
The spending multiplier is calculated as 1/(1 - MPC). The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600, so the MPC = 0.60. This means the multiplier is 1/(1 – 0.60) = 1/(0.40) = 2.5. Therefore, a $200 increase in net exports translates into a $200 x 2.5 = $500 increase in aggregate demand in the absence of the crowding-out effect.
88
New cards
According to liquidity preference theory, which of the following is NOT true?
a. A decrease in the interest rate increases the quantity of money demanded.
b. A decrease in the interest rate is shown as a movement along the money-demand curve.
c. A decrease in the interest rate does not affect the money-supply curve.
d. A decrease in the price level shifts money demand to the right.
a. A decrease in the interest rate increases the quantity of money demanded.
b. A decrease in the interest rate is shown as a movement along the money-demand curve.
c. A decrease in the interest rate does not affect the money-supply curve.
d. A decrease in the price level shifts money demand to the right.
D
According to liquidity preference theory, a decrease in the interest rate increases the quantity of money demanded but does not change the quantity of money supplied since this is fixed by the Fed. This is shown as a movement along the money-demand curve. Also, an increase in the price level shifts money demand to the right because people will choose to hold a larger quantity of money as a result of higher prices.
According to liquidity preference theory, a decrease in the interest rate increases the quantity of money demanded but does not change the quantity of money supplied since this is fixed by the Fed. This is shown as a movement along the money-demand curve. Also, an increase in the price level shifts money demand to the right because people will choose to hold a larger quantity of money as a result of higher prices.
89
New cards
Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the
a. right by $40 billion
b. right by $50 billion
c. left by $10 billion
d. left by $30 billion
a. right by $40 billion
b. right by $50 billion
c. left by $10 billion
d. left by $30 billion
A
The spending multiplier is calculated as 1/(1 - MPC). Because the MPC = 0.6, this means the multiplier is 1/(1 – 0.6) = 1/(0.4) = 2.5. This means that in the absence of crowding out, a $20 billion increase in government purchases will shift the aggregate demand curve to the right by 2.5 x $20 billion = $50 billion. The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. Therefore, accounting for the crowding-out effect, the aggregate demand curve will only shift to the right by $50 billion - $10 billion = $40 billion.
The spending multiplier is calculated as 1/(1 - MPC). Because the MPC = 0.6, this means the multiplier is 1/(1 – 0.6) = 1/(0.4) = 2.5. This means that in the absence of crowding out, a $20 billion increase in government purchases will shift the aggregate demand curve to the right by 2.5 x $20 billion = $50 billion. The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. Therefore, accounting for the crowding-out effect, the aggregate demand curve will only shift to the right by $50 billion - $10 billion = $40 billion.
90
New cards
If the marginal propensity to consume is 2/3, then the government purchases multiplier is
a. 3
b. 0.33
c. 1.67
d. 2
a. 3
b. 0.33
c. 1.67
d. 2
A
The multiplier for changes in government spending is calculated as 1/(1 - MPC). Since the MPC = 2/3 in this case, the multiplier is 1/(1 – 2/3) = 1/(1/3) = 3.
The multiplier for changes in government spending is calculated as 1/(1 - MPC). Since the MPC = 2/3 in this case, the multiplier is 1/(1 – 2/3) = 1/(1/3) = 3.
91
New cards
Take the following information as given for small, imaginary economy:
When income is $10,000, consumption spending is $6,500.
When income is $11,000, consumption spending is $7,100.
Refer to the scenario. The marginal propensity to consume for this economy is
a. 0.60
b. 0.75
c. 0.80
d. 0.50
When income is $10,000, consumption spending is $6,500.
When income is $11,000, consumption spending is $7,100.
Refer to the scenario. The marginal propensity to consume for this economy is
a. 0.60
b. 0.75
c. 0.80
d. 0.50
A
The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600. This increase represents a $600/$1,000=0.60 fraction of the increase in income.
The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600. This increase represents a $600/$1,000=0.60 fraction of the increase in income.
92
New cards
Changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into a recession are called
a. stabilization policies.
b. time lags.
c. the crowding-out effect.
d. automatic stabilizers.
a. stabilization policies.
b. time lags.
c. the crowding-out effect.
d. automatic stabilizers.
D
Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Stabilization policies are enacted by the government or Fed and may result in time lags.
Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Stabilization policies are enacted by the government or Fed and may result in time lags.
93
New cards
If the marginal propensity to consume is 0.80, and there is no investment accelerator or crowding out, a $10 billion increase in government expenditures would shift the aggregate demand curve to the right by
$10 billion
$8 billion
$50 billion
$40 billion
$10 billion
$8 billion
$50 billion
$40 billion
C
The multiplier is calculated as 1/(1 - MPC). Because the MPC = 0.80, this means the multiplier is 1/(1 – 0.80) = 1/(0.20) = 5. Therefore, a $10 billion increase in government expenditures translates into a $10 billion x 5 = $50 billion increase in aggregate demand in the absence of the crowding-out effect.
The multiplier is calculated as 1/(1 - MPC). Because the MPC = 0.80, this means the multiplier is 1/(1 – 0.80) = 1/(0.20) = 5. Therefore, a $10 billion increase in government expenditures translates into a $10 billion x 5 = $50 billion increase in aggregate demand in the absence of the crowding-out effect.
94
New cards
Which of the following Fed actions would decrease the money supply?
a. Buying bonds
b. Lowering the reserve requirement
c. Decreasing the discount rate
d. Raising the reserve requirement
a. Buying bonds
b. Lowering the reserve requirement
c. Decreasing the discount rate
d. Raising the reserve requirement
D
When the Fed raises the reserve requirement, banks must keep more funds as reserves so the money supply decreases. When the Fed buys government bonds, the reserves of the banking system increase, so the money supply increases. Also, a decrease in the discount rate (the interest rate at which banks can borrow reserved from the Fed) encourages bank borrowing, which increases bank reserves and the money supply.
When the Fed raises the reserve requirement, banks must keep more funds as reserves so the money supply decreases. When the Fed buys government bonds, the reserves of the banking system increase, so the money supply increases. Also, a decrease in the discount rate (the interest rate at which banks can borrow reserved from the Fed) encourages bank borrowing, which increases bank reserves and the money supply.
95
New cards
If the Federal Reserve decided to lower interest rates, it could
a. buy bonds to raise the money supply.
b. buy bonds to lower the money supply.
c. sell bonds to lower the money supply.
d. sell bonds to raise the money supply.
a. buy bonds to raise the money supply.
b. buy bonds to lower the money supply.
c. sell bonds to lower the money supply.
d. sell bonds to raise the money supply.
A
If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level.
If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level.
96
New cards
Which of the following Fed actions would increase the money supply?
a. Buying bonds
b. Selling bonds
c. Increasing the discount rate
d. Raising the reserve requirement
a. Buying bonds
b. Selling bonds
c. Increasing the discount rate
d. Raising the reserve requirement
A
When the Fed buys government bonds, the reserves of the banking system increase, so the money supply increases. When the Fed raises the reserve requirement, banks must keep more funds as reserves so the money supply decreases. Also, an increase in the discount rate (the interest rate at which banks can borrow reserved from the Fed) discourages bank borrowing, which decreases bank reserves and the money supply.
When the Fed buys government bonds, the reserves of the banking system increase, so the money supply increases. When the Fed raises the reserve requirement, banks must keep more funds as reserves so the money supply decreases. Also, an increase in the discount rate (the interest rate at which banks can borrow reserved from the Fed) discourages bank borrowing, which decreases bank reserves and the money supply.
97
New cards
An increase in U.S. net exports would shift U.S. aggregate demand
a. leftward. In an attempt to stabilize the economy, the government could increase expenditures.
b. rightward. In an attempt to stabilize the economy, the government could increase expenditures.
c. leftward. In an attempt to stabilize the economy, the government could decrease expenditures.
d. rightward. In an attempt to stabilize the economy, the government could decrease expenditures.
a. leftward. In an attempt to stabilize the economy, the government could increase expenditures.
b. rightward. In an attempt to stabilize the economy, the government could increase expenditures.
c. leftward. In an attempt to stabilize the economy, the government could decrease expenditures.
d. rightward. In an attempt to stabilize the economy, the government could decrease expenditures.
D
An increase in U.S. net exports shifts U.S. aggregate demand to the right. This would cause the level of output in the economy to rise. If the government wants to stabilize output, it could decrease expenditures which would shift aggregate demand leftward and return output to its previous level.
An increase in U.S. net exports shifts U.S. aggregate demand to the right. This would cause the level of output in the economy to rise. If the government wants to stabilize output, it could decrease expenditures which would shift aggregate demand leftward and return output to its previous level.
98
New cards
Which of the following is an example of crowding out?
a. A decrease in taxes increases interest rates, causing investment to fall.
b. A decrease in consumption increases interest rates, causing investment to fall.
c. A decrease in the money supply increases interest rates, causing investment to fall.
d. A decrease in government spending increases interest rates, causing investment to fall.
a. A decrease in taxes increases interest rates, causing investment to fall.
b. A decrease in consumption increases interest rates, causing investment to fall.
c. A decrease in the money supply increases interest rates, causing investment to fall.
d. A decrease in government spending increases interest rates, causing investment to fall.
A
The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, raises the interest rate and thereby reduces investment spending.
The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, raises the interest rate and thereby reduces investment spending.
99
New cards
If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.
True
False
True
False
False
If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level. Therefore, the aggregate-demand curve also shifts to the right.
If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level. Therefore, the aggregate-demand curve also shifts to the right.
100
New cards
If the Fed decreases the money supply, the interest rate increases.
True
False
True
False
A
A decrease in the money supply increases the equilibrium interest rate since the money-demand curve is downward sloping.
A decrease in the money supply increases the equilibrium interest rate since the money-demand curve is downward sloping.