Question 1

Which of the following was the primary cause of the large increase in oil prices in the 1970s?

Accepted Answer

The primary cause of the large increase in oil prices in the 1970s was a decrease in the supply of oil by OPEC (Organization of the Petroleum Exporting Countries) due to political reasons such as the Arab-Israeli conflict and the Iranian Revolution. This led to a shortage of oil and a significant increase in prices.

Question 2

How will a favourable supply shock shift the short-run Phillips curve, and how does unemployment change?

Accepted Answer

A favourable supply shock will increase the production capacity and decrease the cost of production, which leads to an increase in aggregate supply. This will shift the short-run Phillips curve to the left. This means that at any given inflation rate, the unemployment rate will be lower than before. Therefore, unemployment will fall.

Question 3

Suppose a war disrupts the supply of oil to the country. What would we expect to happen to the short-run aggregate-supply curve, the short-run Phillips curve, and the long-run Phillips curve?

Accepted Answer

A disruption in the supply of oil would increase production costs, leading to a decrease in the short-run aggregate supply (shift left). This would also cause the short-run Phillips curve to shift right, indicating a higher inflation rate for any given level of unemployment. However, the long-run Phillips curve would remain unaffected because it is vertical, reflecting the natural rate of unemployment, which is not influenced by short-term supply shocks.

Question 4

If there is an adverse supply shock, what will most likely happen?

Accepted Answer

An adverse supply shock is an unexpected and sudden decrease in the availability of key inputs, such as a natural disaster that destroys crops or a sudden increase in the price of oil. This would cause the aggregate supply curve to shift to the left as the cost of production for firms increases. As a result, the short-run Phillips curve would shift right as there is an inverse relationship between unemployment and inflation in the short-run. Therefore, the correct choice is D.

Question 5

What is the effect of an adverse supply shock?

Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices, typically causes the short-run Phillips curve to shift to the right, indicating higher inflation at every level of unemployment.

Question 6

If there is a favourable supply shock, what will most likely happen?

Accepted Answer

A favorable supply shock, such as a decrease in the price of oil, typically increases the aggregate supply in an economy, shifting the aggregate supply curve to the right. This leads to lower prices and lower unemployment, which is represented by a leftward shift in the short-run Phillips curve.

Question 7

How will an adverse supply shock shift the short-run aggregate-supply curve, and what will be the effect on prices?

Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices, typically reduces the quantity of goods and services that businesses can produce at any given price level, shifting the short-run aggregate-supply curve to the left. This decrease in supply, with demand remaining constant, leads to higher prices.

Question 8

What would cause the price level to rise and output to fall in the short run?

Accepted Answer

An adverse supply shock, such as a sudden increase in the price of oil or a natural disaster that disrupts production, can cause a decrease in the supply of goods and services in the economy. This will cause the price level to rise due to the scarcity of goods, while output falls as businesses struggle to maintain production levels. A and B are incorrect because changes in the money supply affect the overall level of prices, but do not necessarily impact output. D is incorrect because a favourable supply shock would increase output and decrease the price level.

Question 9

How will a favourable supply shock shift short-run aggregate supply, and how will output change?

Accepted Answer

A favourable supply shock will shift short-run aggregate supply to the right, as it increases the availability of inputs and reduces production costs. This shift will lead to an increase in output, as firms are able to produce more goods and services at a lower cost.

Question 10

What happened to expected inflation in Canada during the 1970s?

Accepted Answer

Expected inflation in Canada during the 1970s increased substantially due to factors such as increased government spending, expansionary monetary policy, and rising oil prices. This led to a period of high inflation and economic instability known as "stagflation."

Question 11

How will a favourable supply shock shift the short-run Phillips curve and how does it change inflation?

Accepted Answer

A favourable supply shock will increase the aggregate supply and reduce production costs, causing a leftward shift of the short-run Phillips curve. This will lead to lower inflation, as firms can produce more output without experiencing higher costs for inputs. Therefore, the correct choice is D, which states that the short-run Phillips curve will shift left and lower inflation.

Question 12

How will an adverse supply shock shift the short-run Phillips curve, and how does inflation change?

Accepted Answer

An adverse supply shock reduces the availability of goods and services, causing an increase in their prices. This leads to higher costs for firms, which lowers their ability to produce output at a given price level. As a result, the short-run Phillips curve shifts to the right, indicating a higher level of inflation at any given level of unemployment. Therefore, the correct choice is A, which states that the short-run Phillips curve shifts right, and inflation rises.

Question 13

Suppose that weather around the world is especially good next year, so farmers have unusually good crops. What might we expect that this will do to the short-run and long-run Phillips curves?

Accepted Answer

The short-run Phillips curve may shift to the left due to lower inflation expectations from increased supply of agricultural products, reducing costs for food and possibly other goods. However, the long-run Phillips curve is not affected by short-term supply changes, as it is determined by factors like technology, labor market institutions, and policy, which are not influenced by temporary changes in weather or crop yields.

Question 14

In 1980, what was the Canadian inflation rate and unemployment rate?

Accepted Answer

The answer of In 1980, what was the Canadian inflation...

Question 15

Suppose that a small economy that depends mostly on agriculture experiences a year with exceptionally good conditions for growing crops. What would the good weather do to the short-run aggregate-supply curve and the short-run Phillips curve?

Accepted Answer

Exceptionally good conditions for growing crops would lead to an increase in agricultural output and a decrease in the costs of production for agricultural goods. This would result in a rightward shift of the short-run aggregate supply curve, indicating an increase in output at any given price level. Additionally, the decrease in production costs would lead to a decrease in inflationary pressures, shifting the short-run Phillips curve to the left. Therefore, the correct answer is C.

Question 16

In 1980, how did the Canadian misery index compare to the average?

Accepted Answer

In 1980, the Canadian misery index, which is calculated by adding the unemployment rate to the inflation rate, was much higher than average due to a combination of high inflation and unemployment rates during that period.

Question 17

If policymakers accommodate an adverse supply shock, what will happen to the unemployment rate and inflation?

Accepted Answer

Accommodating an adverse supply shock typically involves monetary or fiscal policies that stimulate demand. While these policies can help lower unemployment by boosting economic activity, they also tend to increase inflation by raising demand in the face of constrained supply.

Question 18

What will an adverse supply shock cause output and prices to do?

Accepted Answer

An adverse supply shock is a sudden decrease in the availability of a key input, resulting in a decrease in output and an increase in the price level. This means that output will fall (as there are fewer inputs) while prices will rise (as producers will have to charge more to maintain their profits).

Question 19

What will a favourable supply shock cause the price level and output to do?

Accepted Answer

A favourable supply shock will increase the supply of goods and services which will lead to a decrease in prices (deflation) and an increase in output (real GDP). Therefore, the correct answer is D.

Question 20

How will an adverse supply shock shift the short-run Phillips curve, and how will it change unemployment?

Accepted Answer

An adverse supply shock, such as an increase in oil prices or a natural disaster disrupting production, increases the costs of production for firms. As a result, firms will produce less output and hire fewer workers, causing a decrease in aggregate supply. This shift in the short-run Phillips curve to the right implies that at any given level of expected inflation, there will be higher unemployment. Therefore, the correct answer is A, it will shift the short-run Phillips curve right and raise unemployment.

Quiz 17: The Short-Run Tradeoff Between Inflation and Unemployment