Homework answers / question archive / Chapter 12   Unemployment and Inflation 1) The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by A) A

Chapter 12   Unemployment and Inflation 1) The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by A) A

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Chapter 12   Unemployment and Inflation

1) The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

A) A.W. Phillips.

B) Edmund Phelps.

C) Milton Friedman.

D) Robert Gordon.

 

 

 

 

 

2) Phillips's research looked at British data on

A) unemployment and inflation.

B) unemployment and nominal wage growth.

C) inflation and nominal wage growth.

D) unemployment and output.

 

 

 

 

 

3) The negative relationship between unemployment and inflation is known as the

A) aggregate supply curve.

B) aggregate demand curve.

C) Phillips curve.

D) efficiency wage line.

 

 

 

 

 

4) The Phillips curve is a negative empirical relationship between

A) bond prices and interest rates.

B) unemployment and output.

C) inflation and the real interest rate.

D) unemployment and inflation.

 

 

 

 

 

5) The Phillips curve appeared to fit the data well for the United States in the

A) 1960s.

B) 1970s.

C) 1980s.

D) 1990s.

 

 

 

 

 

6) Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between

A) anticipated inflation and frictional unemployment.

B) anticipated inflation and cyclical unemployment.

C) unanticipated inflation and frictional unemployment.

D) unanticipated inflation and cyclical unemployment.

 

 

 

 

 

7) Milton Friedman and Edmund Phelps questioned

A) the use of expectations in the Phillips curve.

B) the stability of the relationship between inflation and unemployment.

C) the existence of a natural rate of unemployment.

D) the existence of a full-employment level of output.

 

 

 

 

 

8) In the extended classical model, an anticipated decrease in the money supply would cause output to ________ and the price level to ________ in the short run.

A) increase; decrease

B) increase; remain unchanged

C) remain unchanged; increase

D) remain unchanged; decrease

 

 

 

 

 

 

9) In the extended classical model, an unanticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

A) increase; increase

B) decrease; remain unchanged

C) remain unchanged; increase

D) decrease; decrease

 

 

 

 

10) In the extended classical model, an unexpected decrease in aggregate demand would cause unanticipated inflation to be ________ and cyclical unemployment to be ________.

A) positive; negative

B) positive; positive

C) negative; negative

D) negative; positive

 

 

 

 

 

11) Based on the theory of the expectations-augmented Phillips curve, if the expected inflation rate is 2%, the short-run Phillips curve will

A) have a kink at an inflation rate of 2%.

B) be the same as the long-run Phillips curve.

C) intersect the long-run Phillips curve at the natural unemployment rate, when the inflation rate is 2%.

D) be horizontal at an expected inflation rate of 2%.

 

 

 

 

 

12) In the expectations-augmented Phillips curve, π = πe - 3(u -

). If π = 0.03 when πe = 0.06 and u = 0.06, then

 =

 

A) 0.02.

B) 0.03.

C) 0.04.

D) 0.05.

 

 

 

 

 

 

13) In the expectations-augmented Phillips curve, π = πe - 3(u -

). If π = 0.06 when πe = 0.06 and u = 0.04, then

 =

 

A) 0.02.

B) 0.03.

C) 0.04.

D) 0.05.

 

 

 

 

14) In the expectations-augmented Phillips curve, π = πe - 3(u -

). If π = 0.09 when πe = 0.06 and u = 0.06, then

 =

 

A) 0.02.

B) 0.03.

C) 0.04.

D) 0.05.

 

 

 

 

 

15) In the expectations-augmented Phillips curve, π = πe - 3(u - 0.06). When π = 0.06 and πe = 0.03, the unemployment rate is

A) 0.04.

B) 0.05.

C) 0.06.

D) 0.07.

 

 

 

 

 

16) In the expectations-augmented Phillips curve, π = πe - 3(u - 0.05). When π = 0.06 and πe = 0.03, the unemployment rate is

A) 0.04.

B) 0.05.

C) 0.06.

D) 0.07.

 

 

 

 

 

 

17) In the expectations-augmented Phillips curve, π = πe - 3(u - 0.05). When π = 0.03 and πe = 0.06, the unemployment rate is

A) 0.04.

B) 0.05.

C) 0.06.

D) 0.07.

 

 

 

 

18) Based on the expectations-augmented Phillips curve, if the natural rate of unemployment is 0.06, and if the actual inflation rate exceeds the expected inflation rate, then the unemployment rate is

A) less than 0.06

B) 0.06.

C) more than 0.06.

D) 0.06 plus 0.5 times the difference between actual and expected inflation.

 

 

 

 

 

19) The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a

A) given rate of inflation.

B) given expected rate of inflation.

C) given level of unemployment.

D) given expected level of unemployment.

 

 

 

 

 

20) Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%. Instead, the Fed increases the money supply by 5%. In the short run, this would cause actual output to be ________ full-employment output and prices to increase by ________ 3%.

A) above; more than

B) above; less than

C) below; more than

D) below; less than

 

 

 

 

 

21) An increase in the expected rate of inflation would

A) shift the Phillips curve upward.

B) shift the Phillips curve downward.

C) shift the long-run Phillips curve to the right.

D) shift the long-run Phillips curve to the left.

 

 

 

 

22) If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

A) shift the Phillips curve to the right.

B) not shift the Phillips curve.

C) shift the Phillips curve to the left.

D) shift the Phillips curve to the left and shift the long-run Phillips curve to the right.

 

 

 

 

 

23) If the expected rate of inflation rose at the same time the natural rate of unemployment rose, the Phillips curve

A) would shift down.

B) would shift up.

C) would not move.

D) might shift up or down or not move, depending on which effect was larger.

 

 

 

 

 

24) A beneficial supply shock would cause

A) a movement up the short-run Phillips curve.

B) a movement down the short-run Phillips curve.

C) the short-run Phillips curve to shift upward and to the right.

D) the short-run Phillips curve to shift downward and to the left.

 

 

 

 

 

 

25) Classicals argue that an adverse supply shock would

A) raise neither the natural rate of unemployment nor the actual rate of unemployment.

B) raise the actual rate of unemployment, but not the natural rate of unemployment.

C) raise the natural rate of unemployment, but not the actual rate of unemployment.

D) raise both the natural rate of unemployment and the actual rate of unemployment.

 

 

 

 

 

26) Historically, Brazil has suffered higher and more variable rates of inflation than Venezuela. You would expect the short-run aggregate supply curve of Brazil to be ________ than that of Venezuela, and the Phillips curve of Brazil to be ________ than that of Venezuela.

A) flatter; flatter

B) flatter; steeper

C) steeper; flatter

D) steeper; steeper

 

 

 

 

27) The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

A) even when expected inflation changes.

B) even when the natural rate of unemployment changes.

C) even if both the expected inflation rate and the natural rate of unemployment change.

D) as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

 

 

 

 

 

28) The Phillips curve shifted during the 1970s primarily because of

A) the two large oil price shocks.

B) the changing demographics of the population.

C) tight monetary policy.

D) easy fiscal policy.

 

 

 

 

 

 

29) Examining data on cyclical unemployment plotted against unanticipated inflation shows

A) a positive relationship.

B) a negative relationship.

C) no significant relationship.

D) a relationship only during the 1960s.

 

 

 

 

 

30) The Friedman-Phelps analysis suggests that there is a long-term relationship between

A) inflation and unemployment.

B) cyclical inflation and structural unemployment.

C) unanticipated inflation and cyclical unemployment.

D) anticipated inflation and structural unemployment.

 

 

 

 

 

31) An analysis of the American economy since 1960 shows that there is a stable relationship between inflation and unemployment

A) only in the short run.

B) only in the long run.

C) in neither the short run nor the long run.

D) in both the short run and the long run

 

 

 

 

12.2   Macroeconomic Policy and the Phillips Curve

 

1) Both classicals and Keynesians agree that policymakers

A) can exploit the Phillips curve in the short run.

B) cannot exploit the Phillips curve in the short run.

C) can keep the unemployment rate permanently below the natural rate by permanently running a high rate of inflation.

D) cannot keep the unemployment rate permanently below the natural rate by permanently running a high rate of inflation.

 

 

 

 

 

2) The Lucas critique is an objection to the assumption that

A) inflation is always and everywhere a monetary phenomenon.

B) there is a negative relationship between inflation and unemployment.

C) historical relationships between macroeconomic variables will continue to hold after new policies are in place.

D) people form expectations rationally.

 

 

 

 

 

3) The argument that when policy changes, people's behavior changes so that historical relationships between macroeconomic variables will no longer hold is known as

A) the Phillips curve.

B) the policy irrelevance hypothesis.

C) hysteresis.

D) the Lucas critique.

 

 

 

 

 

4) The idea that new policies change the economic rules and affect economic behavior, so that no one can safely assume that historical relationships between variables will hold when policies change, is known as

A) Okun's Law.

B) Say's Law.

C) the equation of exchange.

D) the Lucas critique.

 

 

 

 

 

5) The long-run Phillips curve is

A) vertical.

B) horizontal.

C) upward sloping.

D) downward sloping.

 

 

 

 

 

 

6) The fact that the long-run Phillips curve is vertical implies that

A) monetary policy can't affect unemployment.

B) money is neutral in the long run.

C) there is a natural rate of inflation.

D) money can't affect inflation in the long run.

 

 

 

 

12.3   The Problem of Unemployment

 

1) When the economy goes into a recession, there's an increase in

A) frictional unemployment.

B) structural unemployment.

C) cyclical unemployment.

D) voluntary unemployment.

 

 

 

 

2) According to Okun's law, if full-employment output is $5,000 billion, then each percentage point of unemployment sustained for one year reduces output by

A) $50 billion.

B) $100 billion.

C) $150 billion.

D) $200 billion.

 

 

 

 

 

3) Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

A) the cost of retraining workers must be offset against the loss in output that occurs when workers are unemployed.

B) if efficiency wages prevail, and workers are paid their real wage, already employed workers will reduce their effort, reducing output.

C) it ignores the fact that leisure increases during a recession.

D) it ignores the loss of government revenue and additional government expenditures that occur when unemployment rises.

 

 

 

 

 

4) The natural rate of unemployment in the United States generally ________ from 1960 to 1980 and ________ from 1980 to 1995.

A) fell; rose

B) fell; fell

C) rose; fell

D) rose; rose

 

 

 

 

 

5) One reason for the fall in the natural rate of unemployment since 1980 is

A) changes in the demographic composition of the work force.

B) the decline in inflation.

C) increased competition from foreign workers.

D) the depreciation of the dollar relative to foreign currencies.

 

 

 

 

6) The bulk of the decline in the natural rate of unemployment since 1980 is because of

A) a decline in the inflation rate.

B) a decline in the share of young workers in the labor force.

C) increased competition from foreign workers.

D) the depreciation of the dollar relative to foreign currencies.

 

 

 

 

 

7) In years when teenagers become a greater percentage of the labor force,

A) the natural rate of unemployment falls.

B) the natural rate of unemployment rises.

C) the inflation rate rises.

D) the inflation rate falls.

 

 

 

 

 

8) A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

A) the natural rate of unemployment is hard to measure.

B) the natural rate of unemployment almost never changes.

C) policymakers must use data on output to tell whether the unemployment rate is too high or too low.

D) the impact of policy on the economy is subject to long and variable lags.

 

 

 

 

 

 

9) Because the natural rate of unemployment is not known precisely, policymakers who use it as a guide for policy must be

A) less aggressive with policy changes than they would be if they knew the value of the natural rate.

B) more aggressive with policy changes than they would be if they knew the value of the natural rate.

C) ready to change policy more quickly.

D) aware of other data.

 

 

 

 

10) What is the relation between the unemployment rate and the proportion of unemployed workers who have been unemployed for 15 weeks or longer?

A) Both rise in recessions.

B) Both rise in expansions.

C) The unemployment rises in recessions but the proportion of unemployed workers who have been unemployed for 15 weeks or longer declines in recessions.

D) The unemployment falls in recessions but the proportion of unemployed workers who have been unemployed for 15 weeks or longer rises in recessions.

 

 

 

 

 

12.4   The Problem of Inflation

 

1) One cost of a perfectly anticipated inflation is that it

A) transfers wealth from lenders to borrowers.

B) transfers wealth from borrowers to lenders.

C) increases menu costs.

D) damages the role of prices as signals in the economy.

 

 

 

 

2) The costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation are called

A) menu costs.

B) shoe leather costs.

C) transactions costs.

D) imperfect competition costs.

 

 

 

 

 

3) Shoe leather costs are

A) the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.

B) the costs of changing prices, such as printing and mailing catalogues.

C) the costs of the redistribution of wealth between lenders and borrowers.

D) the costs associated with the confusion of prices as signals.

 

 

 

 

 

4) When actual inflation is greater than expected inflation

A) the natural rate of unemployment rises, according to Phillips-curve analysis.

B) cyclical unemployment rises, according to Phillips-curve analysis.

C) there are transfers from borrowers to lenders.

D) there are transfers from lenders to borrowers.

 

 

 

 

 

5) When actual inflation is less than expected inflation

A) the natural rate of unemployment falls, according to Phillips-curve analysis.

B) cyclical unemployment falls, according to Phillips-curve analysis.

C) there are transfers from borrowers to lenders.

D) there are transfers from lenders to borrowers.

 

 

 

 

 

6) One cost of an unanticipated inflation is that it

A) transfers wealth from lenders to borrowers.

B) transfers wealth from borrowers to lenders.

C) decreases menu costs.

D) increases the purchasing power of money.

 

 

 

 

7) A COLA is

A) a center of labor activity.

B) a cost of living adjustment.

C) a contract on long-term assets.

D) a crisis of labor analysis.

 

 

 

 

 

8) Hyperinflation occurs when

A) the inflation rate rises.

B) the inflation rate declines.

C) the inflation rate is extremely high.

D) the inflation rate is extremely low.

 

 

 

 

 

12.5   Fighting Inflation: The Role of Inflation Expectations

 

1) The reduction of the inflation rate is called

A) deflation.

B) disinflation.

C) unflation.

D) reflation.

 

 

 

 

 

 

2) The costs of disinflation would be low if

A) expected inflation falls as inflation falls.

B) wage and price controls were used.

C) the Phillips curve were nearly horizontal.

D) the Phillips curve adjusted slowly to changes in inflation.

 

 

 

 

 

3) A rapid and decisive reduction in the rate of growth of the money supply for the purpose of disinflation is called

A) a salt water policy.

B) a cold shower policy.

C) gradualism.

D) a cold turkey policy.

 

 

 

 

 

4) Keynesians prefer a disinflation policy of

A) cold turkey.

B) stabilization.

C) gradualism.

D) aggregate demand management.

 

 

 

 

 

5) Which of the following disinflationary monetary policies would classical economists prefer?

A) A cold turkey approach that is announced and credible.

B) A cold turkey approach that is announced, but not credible.

C) A gradual approach that is announced and credible.

D) A gradual approach that is unannounced.

 

 

 

 

6) The sacrifice ratio is

A) the amount of output lost when the inflation rate is reduced by one percentage point.

B) the percentage reduction in inflation when output falls one percentage point below potential.

C) the percentage change in employment when output declines by one percentage point.

D) the number of percentage points that the unemployment rate rises when output declines by one percentage point.

 

 

 

 

 

7) The amount of output lost when the inflation rate is reduced by one percentage point is called

A) Okun's law.

B) the sacrifice ratio.

C) the Solow residual.

D) Planck's constant.

 

 

 

 

 

8) Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about

A) 0.

B) 1.

C) 2.

D) 3.

 

 

 

 

 

9) Ball's research showed that the sacrifice ratio

A) was the same for all countries.

B) was nearly zero for most countries.

C) was about 10 for all countries except the United States, where it was about 2.

D) varied considerably across countries.

 

 

 

 

 

 

10) Ball found that an important factor affecting the sacrifice ratio is

A) the flexibility of the labor market.

B) the shape of the yield curve.

C) the real interest rate.

D) the tightness of fiscal policy.

 

 

 

 

11) Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

A) an infinite

B) a high

C) a low

D) a zero

 

 

 

 

 

12) Countries in which wages adjust rapidly to changes in the supply and demand for labor are likely to have ________ sacrifice ratio.

A) an infinite

B) a high

C) a low

D) a negative

 

 

 

 

 

13) Countries in which the government does not regulate the labor market are likely to have ________ sacrifice ratio.

A) an infinite

B) a high

C) a low

D) a negative

 

 

 

 

 

 

14) Ball's research on disinflation across different countries found that

A) costs of disinflation were smaller for rapid disinflation than for gradual disinflation.

B) costs of disinflation were larger for rapid disinflation than for gradual disinflation.

C) costs of disinflation were about the same for both rapid and gradual disinflation.

D) costs of disinflation were smaller when the central bank had a strong inflation-fighting reputation.

 

 

 

 

15) If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is best accomplished by

A) gradualism.

B) increasing money growth.

C) reducing interest rates.

D) a cold-turkey approach.

 

 

 

 

 

16) The main determinant of how quickly expected inflation adjusts to changes in monetary policy is

A) the slope of the Phillips curve.

B) the slope of the short-run aggregate supply curve.

C) the credibility of the central bank.

D) the degree of indexation in the economy.

 

 

 

 

 

17) Inflation expectations in the United States generally

A) fell from 1971 to 1976, rose from 1977 to 1985, then fell from 1985 to 1995, and have been stable since then.

B) fell from 1971 to 1985, then rose from 1985 to 2000, and have been stable since then.

C) rose from 1971 to 1987, then fell from 1987 to 2006.

D) rose from 1971 to 1982, then fell from 1982 to 2000, and have been stable since then.