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If there is a favorable supply shock which direction does the short-run Phillips curve shift? What initially happens to unemployment and inflation as a result of this shock?

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The short-run Philli...

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If the natural rate of unemployment falls,


A) both the short-run Phillips curve and the long-run Phillips curve shift.
B) only the short-run Phillips curve shifts.
C) only the long-run Phillips curve shifts.
D) neither the short-run nor the long-run Phillips curves shift.

E) B) and D)
F) A) and B)

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What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?

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Friedman and Phelps predicted that, over...

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However the unemployment rate was on average higher for many years after. A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because 1) by itself the decrease in inflation had permanently increased unemployment and 2) that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage. Which of these arguments is consistent with the Phillip's curve model?


A) both explanations 1 and 2
B) neither explanation 1 nor 2
C) explanation 1 but not explanation 2
D) explanation 2 but not explanation 1

E) A) and B)
F) B) and D)

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The position of the long-run Phillips curve depends on


A) the inflation rate and the natural rate of unemployment.
B) the inflation rate but not the natural rate of unemployment.
C) the natural rate of unemployment, but not the inflation rate.
D) neither the natural rate of unemployment nor the inflation rate.

E) All of the above
F) None of the above

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Figure 35-1. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the right-hand diagram, U represents the unemployment rate. Figure 35-1. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the right-hand diagram, U represents the unemployment rate. -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left- hand graph. Then it is apparent that the price index equaled A) 130 in 2011. B) 115 in 2011. C) 110 in 2011. D) 100 in 2011. Figure 35-1. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the right-hand diagram, U represents the unemployment rate. -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left- hand graph. Then it is apparent that the price index equaled A) 130 in 2011. B) 115 in 2011. C) 110 in 2011. D) 100 in 2011. -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left- hand graph. Then it is apparent that the price index equaled


A) 130 in 2011.
B) 115 in 2011.
C) 110 in 2011.
D) 100 in 2011.

E) B) and C)
F) All of the above

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If the central bank decreases the money supply, then output


A) and unemployment rises.
B) rises and unemployment falls.
C) falls and unemployment rises.
D) and unemployment falls.

E) A) and D)
F) A) and C)

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The long-run Phillips curve would shift left if


A) the money supply increased or if the minimum wage was reduced.
B) the money supply increased but not if the minimum wage was reduced.
C) the minimum wage was reduced but not if the money supply increased.
D) None of the above is correct.

E) B) and C)
F) B) and D)

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According to the Phillips curve, unemployment and inflation are negatively related in


A) the short run and in the long run.
B) the short run, but not in the long run.
C) the long run, but not in the short run.
D) neither the long run nor the short run.

E) A) and D)
F) B) and C)

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Short-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.

A) True
B) False

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Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

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Consider what happens when the aggregate...

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Which of the following increases inflation and reduces unemployment in the short run?


A) either an increase in government expenditures by itself or an increase in the money supply growth rate by itself
B) an increase in government expenditures, but not an increase in the money supply growth rate
C) an increase in the money supply growth rate, but not an increase in government expenditures
D) neither an increase in government expenditures nor an increase in the money supply

E) B) and D)
F) B) and C)

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A country is likely to have a higher sacrifice ratio if


A) contracts are shorter, and people believe the central bank will reduce inflation.
B) contracts are longer, and people believe the central bank will not reduce inflation
C) contracts are longer, and people believe the central bank will reduce inflation.
D) contracts are shorter, and people believe the central bank will not reduce inflation.

E) A) and C)
F) A) and B)

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To say that the natural rate of unemployment changes over time is to say that


A) the short-run Phillips curve shifts over time.
B) the long-run Phillips curve shifts over time.
C) the aggregate demand curve shifts over time.
D) the Federal Reserve influences the natural rate of unemployment over time.

E) A) and B)
F) C) and D)

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If the sacrifice ratio is 2, reducing the inflation rate from 4 percent to 2 percent would


A) cost 1 percent of annual output.
B) cost 4 percent of annual output.
C) imply that unemployment would rise by 1%.
D) imply that unemployment would rise by 4%.

E) B) and D)
F) None of the above

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Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is


A) downward-sloping, which implies that monetary and fiscal policies can influence the level of unemployment in the long run.
B) downward-sloping, which implies that monetary and fiscal policies cannot influence the rate of inflation in the long run.
C) vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run.
D) vertical, which implies that monetary and fiscal policies cannot influence the rate of inflation in the long run.

E) All of the above
F) A) and B)

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Which of the following is upward-sloping?


A) both the long-run and the short-run Phillips curve
B) neither the long-run nor the short-run Phillips curve
C) the long-run Phillips curve, but not the short-run Phillips curve
D) the short-run Phillips curve, but not the long-run Phillips curve

E) A) and B)
F) A) and C)

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A policy change that changes the natural rate of unemployment changes


A) neither the long-run Phillips curve nor the long-run aggregate supply curve.
B) both the long-run Phillips curve and the long-run aggregate supply curve.
C) the long-run Phillips curve, but not the long-run aggregate supply curve.
D) the long-run aggregate supply curve, but not the long-run Phillips curve.

E) A) and B)
F) C) and D)

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A central bank sets out to reduce unemployment by changing the money supply growth rate. The long-run Phillips curve shows that in comparison to their original rates, this policy will eventually lead to


A) an increase in both the inflation rate and the unemployment rate.
B) an increase in the inflation rate and a reduction in the unemployment rate.
C) no change in either the inflation rate or the unemployment rate.
D) an increase in the inflation rate and no change in the unemployment rate.

E) A) and D)
F) C) and D)

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As aggregate demand shifts left along the short-run aggregate supply curve,


A) inflation and unemployment are higher.
B) inflation is higher and unemployment is lower.
C) unemployment is higher and inflation is lower.
D) unemployment and inflation are lower.

E) B) and D)
F) None of the above

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