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| 1 | |
The original Phillips curve implied |
| | A) | a policy tradeoff between the output level and the price level |
| | B) | a policy tradeoff between the unemployment level and the inflation level |
| | C) | 2 percent drop in the unemployment rate for a 1 percent increase in output |
| | D) | 1 percent increase in the unemployment rate for a 2 percent decrease in output |
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| 2 | |
If you plotted the rates of inflation and unemployment in the U.S. between 1961 and 1969 only, you might conclude that |
| | A) | there is an inverse relationship between the unemployment and inflation rates |
| | B) | there is a positive relationship between the unemployment and inflation rates |
| | C) | there is no fixed relationship between the unemployment and inflation rates |
| | D) | neither inflation nor unemployment ever exceeded 4.5 percent in that time period |
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| 3 | |
The inflation-expectations-augmented Phillips curve implies that |
| | A) | a decrease in expected inflation will shift the Phillips curve to the right |
| | B) | unemployment is below its natural rate if actual inflation is below expected inflation |
| | C) | unemployment is at its natural rate when expected inflation is equal to actual inflation |
| | D) | stagflation occurs when the Phillips curve shifts to the left |
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| 4 | |
The Phillips curve that is based on rational expectations differs from the inflation-expectations-augmented Phillips curve since under rational expectations |
| | A) | people are assumed to always make perfect inflation forecasts |
| | B) | unanticipated monetary policy changes cannot affect the actual inflation rate |
| | C) | restrictive monetary policy causes an immediate shift of the Phillips curve to the right |
| | D) | none of the above |
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| 5 | |
According to the inflation-expectations-augmented Phillips curve, stagflation is a situation when |
| | A) | the actual inflation rate is high and is below the expected inflation rate |
| | B) | the actual inflation rate is high and is above the expected inflation rate |
| | C) | the actual inflation rate is high but unemployment is below its natural rate |
| | D) | the actual inflation rate has had a chance to adjust to the expected inflation rate |
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| 6 | |
When the actual inflation rate is high and below the expected inflation rate, then |
| | A) | the rate of unemployment is most likely below its natural rate |
| | B) | the economy is likely to experience a sharp increase in unemployment in the future |
| | C) | the economy is most likely in a period of stagflation |
| | D) | nominal wages will have to increase before the economy can get back to full employment |
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| 7 | |
Stagflation is defined as a period of high unemployment combined with high inflation; however, |
| | A) | it is inconsistent with the inflation-expectations-augmented Phillips curve |
| | B) | it cannot persist, since the economy eventually will return to full employment |
| | C) | it is of no concern to policy makers, since such a situation is unlikely to ever occur |
| | D) | it can only occur if actual inflation is above expected inflation |
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| 8 | |
The natural rate of unemployment is generally assumed to be |
| | A) | very close to zero percent since everyone who wants to work is already working |
| | B) | the rate of unemployment at which the actual inflation rate is zero |
| | C) | the rate of unemployment at which the expected inflation rate is zero |
| | D) | the rate of unemployment at which the expected inflation rate is equal to the actual inflation rate |
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| 9 | |
A rational expectations model in which the short-run Phillips curve moves up or down in response to newly available information about monetary growth was first proposed by |
| | A) | M. Friedman |
| | B) | R.E. Lucas |
| | C) | E. Phelps |
| | D) | A.W. Phillips |
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| 10 | |
In the short run, wages are considered to be sticky rather than flexible since |
| | A) | firms may be willing to pay above market-clearing wages to keep workers motivated |
| | B) | labor contracts sometimes are set for a few years |
| | C) | firms are unsure about their competitors' behavior and only reluctantly change prices and wages following a change in aggregate demand |
| | D) | all of the above |
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| 11 | |
The coordination approach to the Phillips curve focuses on the fact that |
| | A) | fiscal and monetary policies often are uncoordinated |
| | B) | firms are reluctant to change wages and prices because they aren’t sure what their competitors will do |
| | C) | workers are well informed about changes in their nominal wages but not about changes in their real wages |
| | D) | anticipated changes in monetary policy have no significant effect on the unemployment rate |
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| 12 | |
The efficiency wage theory suggests that |
| | A) | wages always immediately adjust to the market-clearing level |
| | B) | unanticipated changes in monetary policy have no effect on wages or unemployment |
| | C) | paying workers a higher wage rate may increase labor productivity |
| | D) | wages can be adjusted easily following a price change to maintain full employment |
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| 13 | |
The efficiency wage theory focuses on the fact that |
| | A) | firms are willing to pay above market-clearing wages as a way to motivate labor |
| | B) | an unanticipated increase in money supply is always followed by increased wage demands |
| | C) | paying employees above-market clearing wages is a bad business decision and may get the economy into a wage-price spiral |
| | D) | wages always adjust rapidly to their market-clearing level so full employment can be easily maintained |
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| 14 | |
Slow wage and price adjustment prevents the economy from maintaining a full-employment level of output. Why do firms fail to adjust wages and prices more frequently? |
| | A) | firms prefer to avoid changing wages and prices even though the costs are relatively small |
| | B) | firms have problems coordinating wage and price adjustments |
| | C) | firms often pay their workers above market clearing wages to keep them motivated |
| | D) | all of the above |
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| 15 | |
Which of the following equations best describes Okun’s law? |
| | A) | (Y - Y*) = 0.5(u - u*) |
| | B) | (Y - Y*)/ Y* = - 2(u - u*) |
| | C) | (Y* - Y) = 2(u - u*) |
| | D) | (Y* - Y)/Y = - 0.5(u - u*) |
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| 16 | |
In order to derive the upward sloping AS-curve depicted in this chapter we need to use |
| | A) | the Phillips curve relationship |
| | B) | the price-cost relation |
| | C) | Okun's law |
| | D) | all of the above |
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| 17 | |
In an AD-AS model with an upward sloping AS-curve, an increase in the output level combined with a price decrease and a lower interest rate is most likely the result of |
| | A) | expansionary fiscal policy combined with restrictive monetary policy |
| | B) | an adverse supply shock followed by expansionary monetary policy |
| | C) | a favorable supply shock |
| | D) | a decrease in money supply |
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| 18 | |
Which of the following is the most likely result of an unanticipated increase in money supply? |
| | A) | higher prices and output in the medium run but no change in output in the long run |
| | B) | higher prices and lower real money balances in both the medium and the long run |
| | C) | higher prices and employment in the medium run, but no change in output and prices in the long run |
| | D) | higher prices and output in the medium and long runs |
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| 19 | |
If the government employs restrictive monetary policy in response to an adverse supply shock, |
| | A) | the inflation rate and the natural rate of unemployment will both decrease |
| | B) | the rate of unemployment will increase sharply |
| | C) | unemployment will remain at its natural level |
| | D) | the shift in the AS-curve can be reversed almost immediately |
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| 20 | |
If there is a decrease in the price of oil and computers, the central bank can achieve a smooth expansion while maintaining a low inflation rate by |
| | A) | doing nothing, since otherwise economic agents will be unable to make rational decisions |
| | B) | restricting monetary growth, since otherwise the economy will grow too fast |
| | C) | waiting to see whether the price decreases will be reflected in the CPI |
| | D) | none of the above |
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