Question 1

Suppose OPEC is unable to come to an agreement regarding oil production and as a result the price of oil drops. Which of the following would you expect to occur as a result of this favorable supply shock?
A)The short-run Phillips curve will shift to the right and the unemployment rate will increase.
B)The short-run Phillips curve will shift to the right and the unemployment rate will decrease.
C)The short-run Phillips curve will shift to the left and the unemployment rate will increase.
D)The short-run Phillips curve will shift to the left and the unemployment rate will decrease.

Accepted Answer

A favorable supply shock, such as a decrease in oil prices, will decrease production costs and increase aggregate supply. This will shift the short-run Phillips curve to the left, resulting in lower unemployment and higher output. Therefore, the correct choice is D, the short-run Phillips curve will shift to the left and the unemployment rate will decrease.

Question 2

In 1968, economist Milton Friedman published a paper criticizing the Phillips curve on the grounds that
A)it seemed to work for wages but not for inflation.
B)monetary policy was ineffective in combating inflation.
C)the Phillips curve did not apply in the long run.
D)Phillips had made errors in collecting his data.

Accepted Answer

Friedman argued that in the long run, the Phillips curve would not hold, as the relationship between unemployment and inflation would become unstable. This was due to factors such as adaptive expectations and the natural rate of unemployment. Therefore, the Phillips curve could not be relied upon as a stable tool for policymaking.

Question 3

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should
A)increase the money supply growth rate which raises the inflation rate.
B)increase the money supply growth rate which reduces the inflation rate.
C)decrease the money supply growth rate which raises the inflation rate.
D)decrease the money supply growth rate which reduces the inflation rate.

Accepted Answer

Increasing the money supply growth rate can stimulate economic activity, potentially reducing unemployment. However, it may also lead to higher inflation.

Question 4

If there is an increase in the price of oil, then
A)unemployment rises. If the central bank tries to counter this increase, inflation rises.
B)unemployment rises. If the central bank tries to counter this increase, inflation falls.
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.

Accepted Answer

An increase in the price of oil can lead to higher production costs for many businesses, potentially causing them to reduce their workforce, thus increasing unemployment. If the central bank attempts to counteract this by stimulating the economy (e.g., through lowering interest rates or increasing money supply), it can lead to higher inflation as more money chases the same amount of goods and services.

Question 5

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.

Accepted Answer

Milton Friedman and Edmund Phelps argued that in the long run, the Phillips curve is vertical, indicating that monetary and fiscal policies cannot permanently alter the natural rate of unemployment. This suggests that attempts to reduce unemployment below its natural rate through monetary and fiscal policies would only lead to higher inflation in the long run without affecting long-term unemployment.

Question 6

Milton Friedman argued that the Fed's control over the money supply could be used to peg
A)the level or growth rate of a nominal variable, but not the level or growth rate of a real variable.
B)the level of a nominal or real variable, but not the growth rate of a real or nominal variable.
C)the level or growth rate of a real variable, but not the level or growth rate of a nominal variable.
D)both levels and growth rates of both real and nominal variables.

Accepted Answer

Milton Friedman believed in the Quantity Theory of Money, which states that changes in the money supply have a direct and proportional effect on the price level in the economy. Therefore, the Fed's control over the money supply can be used to peg the level or growth rate of a nominal variable, such as the price level or inflation rate. However, it cannot be used to control the level or growth rate of a real variable, such as real GDP or real income, as these are determined by factors outside of the Fed's control.

Question 7

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the
A)unemployment rate.
B)inflation rate.
C)growth rate of real national income.
D)All of the above are correct.

Accepted Answer

Friedman argued that the Phillips curve is a short-run relationship and in the long-run, inflation is determined by the money supply. Therefore, the Fed can control inflation by controlling the money supply, but not unemployment or the growth rate of real national income. Thus, the correct choice is B) inflation rate.

Question 8

In the late 1960s, economist Edmund Phelps published a paper that
A)argued that there was no long-run tradeoff between inflation and unemployment.
B)disproved Friedman's claim that monetary policy was effective in controlling inflation.
C)showed the optimal point on the Phillips curve was at an unemployment rate of 5 percent and an inflation rate of 2 percent.
D)argued that the Phillips curve was stable and that it would not shift.

Accepted Answer

Phelps argued in his paper "Phillips Curve, Expectations of Inflation and Optimal Unemployment over Time" that there was no long-run tradeoff between inflation and unemployment, contradicting the Phillips curve theory that suggested a negative relationship between the two. Phelps believed that in the long run, expected inflation would adjust to actual inflation, rendering any short-term tradeoff between inflation and unemployment unsustainable.

Question 9

Friedman argued that the Fed could use monetary policy to peg
A)the level of real GDP.
B)the growth rate of real GDP.
C)the rate of unemployment.
D)None of the above is correct.

Accepted Answer

Friedman believed that the Fed should focus on maintaining a stable monetary policy, rather than trying to target specific macroeconomic variables such as real GDP or unemployment. Therefore, none of the options listed in the question are correct.

Question 10

According to classical macroeconomic theory, in the long run
A)monetary growth affects both real and nominal variables.
B)the only real variable affected by monetary growth is the unemployment rate.
C)a number of factors that affect unemployment are influenced by monetary growth.
D)monetary growth affects nominal but not real variables.

Accepted Answer

According to classical macroeconomic theory, in the long run, monetary growth only affects nominal variables and has no effect on real variables such as output and employment. This is because in the long run, prices and wages adjust to changes in the money supply, resulting in no real effects on the economy.

Question 11

Friedman and Phelps argued
A)that in the long run, monetary growth did not influence those factors that determine the economy's unemployment rate.
B)that the Phillips curve could be exploited in the long run by using monetary, but not fiscal policy.
C)that the short-run Phillips curve was very steep, but not vertical.
D)that there was neither a short-run nor long-run tradeoff between inflation and unemployment.

Accepted Answer

The answer of Friedman and Phelps argued
A)that in the long...

Question 12

Friedman argued that the Fed could use monetary policy to peg
A)nominal exchange rates.
B)the level of real GDP.
C)the rate of unemployment.
D)None of the above is correct.

Accepted Answer

Friedman argued that the Fed could use monetary policy to peg nominal exchange rates, which would help stabilize prices and promote international economic stability.

Question 13

In the late 1960s, Milton Friedman and Edmund Phelps argued that
A)the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run.
B)the trade-off between inflation and unemployment did not apply in the long run. This claim is inconsistent with monetary neutrality in the long run.
C)the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is consistent with monetary neutrality in the long run.
D)the trade-off between inflation and unemployment applied in both the short run and the long run. This claim is inconsistent with monetary neutrality in the long run.

Accepted Answer

Milton Friedman and Edmund Phelps argued that the trade-off between inflation and unemployment did not apply in the long run. They argued that any attempt to reduce unemployment through expansionary monetary policy would result in a temporary decrease in unemployment but would ultimately lead to higher inflation, which would bring unemployment back to its natural rate in the long run. This is consistent with the concept of monetary neutrality in the long run, which is the idea that changes in the money supply do not affect real economic activity in the long run.

Question 14

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment
A)existed in the long run and the short run.
B)existed in the long run but not the short run.
C)existed in the short run but not the long run.
D)did not exist.

Accepted Answer

The answer of In the late 1960's, Milton Friedman and...

Question 15

A favorable supply shock shifts the short-run Phillips curve
A)right and inflation rises.
B)right and inflation falls.
C)left and inflation rises.
D)left and inflation falls.

Accepted Answer

A favorable supply shock increases the availability of goods and services, decreasing their prices and shifting the short-run Phillips curve to the left. This leads to lower inflation.

Question 16

If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should
A)increase the money supply growth rate which also moves unemployment closer to its natural rate.
B)increase the money supply growth rate, but this moves unemployment further from its natural rate.
C)decrease the money supply growth rate which also moves unemployment closer to its natural rate.
D)decrease the money supply growth rate, but this moves unemployment further from its natural rate.

Accepted Answer

The answer of If the Fed wants to reverse the...

Question 17

Suppose that a drought significantly reduces agricultural production one year. In addition, suppose the Fed accommodates this supply shock by implementing an expansionary monetary policy. Which of the following would you expect to occur as a result of these changes?
A)The short-run aggregate supply curve will shift to the right, the short-run Phillips Curve will shift to the left, and the accommodating monetary policy will raise inflation while lowering unemployment.
B)The short-run aggregate supply curve will shift to the right, the short-run Phillips Curve will shift to the left, and the accommodating monetary policy will increase unemployment while lowering inflation.
C)The short-run aggregate supply curve will shift to the left, the short-run Phillips Curve will shift to the right, and the accommodating monetary policy will raise inflation while lowering unemployment.
D)The short-run aggregate supply curve will shift to the left, the short-run Phillips Curve will shift to the right, and the accommodating monetary policy will increase unemployment while lowering inflation.

Accepted Answer

A drought reduces agricultural production, shifting the short-run aggregate supply curve to the left. The Fed's expansionary monetary policy increases demand, which can raise inflation and lower unemployment, shifting the short-run Phillips Curve to the right.

Question 18

In response to an adverse supply shock, suppose the Fed implements accommodating monetary policy. Which of the following occurs as a result of the accommodating monetary policy?
A)Aggregate demand shifts to the left, which increases inflation and increases unemployment in the short run.
B)Aggregate demand shifts to the left, which decreases inflation and increases unemployment in the short run.
C)Aggregate demand shifts to the right, which increases inflation and increases unemployment in the short run.
D)Aggregate demand shifts to the right, which increases inflation and decreases unemployment in the short run.

Accepted Answer

Accommodating monetary policy involves increasing the money supply and decreasing interest rates, which encourages borrowing and spending. This leads to a shift in aggregate demand to the right, which can help offset the adverse effects of the supply shock. As a result, both inflation and unemployment are likely to increase in the short run. Therefore, the best answer is D.

Question 19

If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should
A)increase the money supply growth rate which raises the inflation rate.
B)increase the money supply growth rate which reduces the inflation rate.
C)decrease the money supply growth rate which raises the inflation rate.
D)decrease the money supply growth rate which reduces the inflation rate.

Accepted Answer

The answer of If the Fed wants to reverse the...

Question 20

Suppose that a drought significantly reduces agricultural production one year. Which of the following would likely occur as a result of the bad weather?
A)The short-run aggregate supply curve will shift to the right, and the short-run Phillips Curve will shift to the right.
B)The short-run aggregate supply curve will shift to the right, and the short-run Phillips Curve will shift to the left.
C)The short-run aggregate supply curve will shift to the left, and the short-run Phillips Curve will shift to the right.
D)The short-run aggregate supply curve will shift to the left, and the short-run Phillips Curve will shift to the left.

Accepted Answer

A drought reduces agricultural output, causing the short-run aggregate supply curve to shift left due to decreased supply. This can lead to higher prices and inflation, shifting the short-run Phillips Curve to the right.

Quiz 35: The Short-Run Tradeoff Between Inflation and Unemployment

Suppose OPEC is unable to come to an agreement regarding oil production and as a result the price of oil drops. Which of the following would you expect to occur as a result of this favorable supply shock?

In 1968, economist Milton Friedman published a paper criticizing the Phillips curve on the grounds that

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should

If there is an increase in the price of oil, then

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

Milton Friedman argued that the Fed's control over the money supply could be used to peg

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the

In the late 1960s, economist Edmund Phelps published a paper that

Friedman argued that the Fed could use monetary policy to peg

According to classical macroeconomic theory, in the long run

Friedman and Phelps argued

Friedman argued that the Fed could use monetary policy to peg

In the late 1960s, Milton Friedman and Edmund Phelps argued that

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment

A favorable supply shock shifts the short-run Phillips curve

If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it should

Suppose that a drought significantly reduces agricultural production one year. In addition, suppose the Fed accommodates this supply shock by implementing an expansionary monetary policy. Which of the following would you expect to occur as a result of these changes?

In response to an adverse supply shock, suppose the Fed implements accommodating monetary policy. Which of the following occurs as a result of the accommodating monetary policy?

If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should

Suppose that a drought significantly reduces agricultural production one year. Which of the following would likely occur as a result of the bad weather?