Question 1

Which of the following is the most correct statement about the relationship between inflation and unemployment?
A)In the short run, falling inflation is associated with falling unemployment.
B)In the short run, falling inflation is associated with rising unemployment.
C)In the long run, falling inflation is associated with falling unemployment.
D)In the long run, falling inflation is associated with rising unemployment.

Accepted Answer

In the short run, there is an inverse relationship between inflation and unemployment known as the Phillips Curve. This means that when inflation falls, unemployment tends to rise, and vice versa. This relationship exists because when demand for goods and services increases, prices tend to rise (inflation), and firms need to hire more workers to meet the increased demand, leading to lower unemployment. However, in the long run, this relationship breaks down as prices and wages adjust to changes in inflation, known as the natural rate of unemployment. Therefore, choice B is the most correct statement about the relationship between inflation and unemployment in the short run.

Question 2

In the short run, which of the following is not correct?
A)Increasing the money supply increases the demand for goods and services.
B)Increasing the money supply encourages firms to hire more workers.
C)Lowering the money supply leads to a higher level of unemployment.
D)Policies that encourage higher employment will also induce a lower rate of inflation.

Accepted Answer

In the short run, policies that encourage higher employment can actually lead to higher inflation due to increased demand for goods and services. This is because, as employment rises, so does consumers' purchasing power, potentially leading to demand-pull inflation. This contradicts the statement in option D, making it incorrect in the context of short-run economic behavior.

Question 3

For a number of years country A had inflation of 3% but for the last five years has had inflation of 6%. Country B had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment?
A)both country A and country B
B)neither country A nor country B
C)country A but not country B
D)country B but not country A

Accepted Answer

The higher inflation rate is more likely to reduce unemployment in Country B but not in Country A. When inflation unexpectedly rises in Country B, nominal wages might be slow to adjust, meaning that workers are willing to accept lower real wages. This reduction in real wages can lead to firms hiring more workers, thus reducing unemployment. In Country A, where inflation has been high for five years, workers may have already adjusted their expectations of inflation and negotiators might account for inflation in wage contracts. This means that the reduction in real wages due to higher inflation would not have as much of an impact on hiring.

Question 4

The business cycle is measured by the
A)production of goods and services.
B)number of people employed.
C)the interest rate.
D)Both a and b are correct.

Accepted Answer

The business cycle is measured by both the production of goods and services, as well as the number of people employed. Therefore, Choices A and B are both correct. The interest rate may provide insight into the current state of the economy, but it is not a direct measure of the business cycle.

Question 5

In response to the deep economic downturn in the US in 2008 and 2009, the US
A)reduced taxes.
B)increased government spending.
C)increased the supply of money.
D)All of the above are correct.

Accepted Answer

The answer of In response to the deep economic downturn...

Question 6

The irregular and largely unpredictable fluctuations in economic activity are called
A)market failure.
B)business cycle.
C)inflation.
D)unemployment.

Accepted Answer

The irregular and largely unpredictable fluctuations in economic activity are called the business cycle. This cycle consists of four stages: expansion, peak, contraction, and trough.

Question 7

Which of the following is the primary cause of inflation?
A)an increase in the quantity of money
B)an increase in government spending
C)an increase in unemployment
D)an increase in productivity

Accepted Answer

Inflation is primarily caused by an increase in the quantity of money. This is because when there is more money in circulation, the overall demand for goods and services increases, which can lead to prices rising. Conversely, if there is less money in circulation, demand for goods and services will decrease, which can lead to lower prices. Factors such as government spending, unemployment, and productivity can also have an impact on inflation, but they are not the primary cause.

Question 8

The mainstream view among economists is that
A)society faces a tradeoff between unemployment and inflation, but only in the short run.
B)society faces a tradeoff between unemployment and inflation, but only in the long run.
C)society faces a tradeoff between unemployment and inflation, both in the short run and in the long run.
D)no tradeoff exists between unemployment and inflation, either in the short run or in the long run.

Accepted Answer

The mainstream view among economists is that there is a short run tradeoff between unemployment and inflation, known as the Phillips curve. This means that in the short run, reducing unemployment may result in higher inflation, and reducing inflation may result in higher unemployment. However, in the long run, this tradeoff disappears as the economy adjusts to changes in inflation expectations. Therefore, society faces a tradeoff between unemployment and inflation, but only in the short run.

Question 9

Which of the following is an important cause of inflation in an economy?
A)increases in productivity in the economy
B)the influence of positive externalities on the economy
C)lack of property rights in the economy
D)growth in the quantity of money in the economy

Accepted Answer

Growth in the quantity of money in the economy is an important cause of inflation as it leads to an increase in the demand for goods and services, which in turn leads to an increase in prices. As the quantity of money increases, each unit of currency buys fewer goods and services, leading to a decrease in the purchasing power of money. This can result in a general increase in the level of prices across the economy, known as inflation.

Question 10

Low rates of inflation are generally associated with
A)low rates of government spending.
B)small or nonexistent government budget deficits.
C)low rates of productivity growth.
D)low rates of growth of the quantity of money.

Accepted Answer

Low rates of inflation are usually related to the low growth rate of the supply of money because less money in circulation reduces demand and prices remain stable or may even decline. In contrast, choices A and B relate to government spending and budget deficits, whereas the question only asks for inflation. Similarly, low rates of productivity growth may lead to unemployment and reduced economic output but do not necessarily affect inflation rates.

Question 11

The business cycle is the
A)relationship between unemployment and inflation.
B)irregular fluctuations in economic activity.
C)positive relationship between the quantity of money in an economy and inflation.
D)predictable changes in economic activity due to changes in government spending and taxes.

Accepted Answer

The business cycle refers to the irregular fluctuations in economic activity, characterized by periods of expansion followed by periods of contraction (recession). These fluctuations are influenced by a variety of factors such as changes in consumer and business confidence, government policies, and international economic conditions. The business cycle is not necessarily predictable or directly influenced by changes in government spending and taxes, although they can have some impact. It is also not directly related to the relationship between unemployment and inflation or the quantity of money in the economy.

Question 12

The relatively low inflation experienced in the United States in the 1990s is attributable to
A)slow growth of U.S. productivity during the 1990s.
B)slow growth of the quantity of money in the U.S. in the 1990s.
C)low levels of government spending in the U.S. in the 1980s and 1990s.
D)the eight-year presidency of William Jefferson Clinton during the 1990s.

Accepted Answer

The slow growth of the quantity of money in the U.S. in the 1990s contributed to the relatively low inflation experienced during that decade. The Federal Reserve closely monitored the growth of the money supply and implemented policies to keep it in check.

Question 13

During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that
A)the United Kingdom has a better education system than Turkey.
B)the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
C)workers in Turkey are more productive than workers in the United Kingdom.
D)there are more instances of market power in Turkey than in the United Kingdom.

Accepted Answer

The rate of growth of the quantity of money directly affects inflation. If the rate of growth of the quantity of money is slower, then the inflation rates will be lower. Therefore, the likely explanation for the UK experiencing low levels of inflation while Turkey experienced high levels of inflation is that the rate of growth of the quantity of money was slower in the UK than in Turkey.

Question 14

The short-run tradeoff between inflation and unemployment implies that, in the short run,
A)a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.
B)an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.
C)policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate.
D)policymakers can influence the inflation rate, but not the unemployment rate.

Accepted Answer

The short-run tradeoff between inflation and unemployment, known as the Phillips curve, suggests that a decrease in the growth rate of the quantity of money (which may be implemented by policymakers to combat inflation) will be accompanied by an increase in the unemployment rate. Similarly, an increase in the growth rate of the quantity of money (which may be implemented to boost economic growth) will be accompanied by a decrease in the unemployment rate. However, this tradeoff is applicable only in the short run, as in the long run, changes in the quantity of money will only affect the price level and not the rate of unemployment. Therefore, Option A is the correct choice. Option B suggests a positive relationship between the growth rate of money and unemployment rate, which is incorrect. Option C is also incorrect as policymakers may often face a tradeoff between inflation and unemployment, and reducing both simultaneously may not be feasible. Option D is incorrect as policymakers can influence the unemployment rate through various policies, such as fiscal and monetary policy.

Question 15

The combination of President Obama's strategies and the Federal Reserve's reaction to the deep economic downturn in the US in 2008 and 2009
A)was intended to reduce unemployment.
B)may lead to excessive inflation over time.
C)resulted in higher taxes and an increased supply of money.
D)Both a and b are correct.

Accepted Answer

President Obama's strategies, such as the American Recovery and Reinvestment Act, were aimed at reducing unemployment by increasing government spending on infrastructure and creating jobs. Meanwhile, the Federal Reserve implemented expansionary monetary policies, including lowering interest rates and increasing the money supply, to stimulate borrowing and spending. However, this combination of fiscal and monetary policies can lead to excessive inflation over time as it increases the supply of money in the economy. Additionally, some of Obama's strategies, such as increased government spending, can lead to higher taxes in the longer term to pay for these measures.

Question 16

The tradeoff between inflation and unemployment
A)implies that policies designed to reduce unemployment also reduce inflation.
B)was eliminated by improved economic policies in the 1900s.
C)is a long-run tradeoff, persisting for decades, according to most economists.
D)None of the above are correct.

Accepted Answer

The tradeoff between inflation and unemployment, often referred to as the Phillips curve, has been shown to not hold true in the long run. Short-term changes in one variable may impact the other, but over time the relationship breaks down. Thus, none of the options presented are correct.

Question 17

Which of the following claims is consistent with the views of mainstream economists?
A)If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily fall.
B)If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily rise.
C)If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently fall.
D)If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently rise.

Accepted Answer

Mainstream economists generally subscribe to the Phillips curve, which suggests that there is an inverse relationship between inflation and unemployment in the short run. Therefore, increasing the rate of inflation from 3 percent to 6 percent would lead to a temporary fall in the rate of unemployment. However, this relationship may not hold in the long run.

Question 18

In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to observe during this short period of time?
A)Inflation fell and unemployment fell.
B)Inflation and unemployment were both unaffected.
C)Inflation fell and unemployment increased.
D)Inflation fell and unemployment was unchanged.

Accepted Answer

During a period of reducing inflation, it is likely that unemployment will increase as a result of contractionary policies such as increasing interest rates and reducing government spending. As a result, there may be a temporary decrease in economic growth in the short term as businesses cut back on hiring and investment. However, over the long term, lower inflation rates can create a more stable economy and promote sustainable growth.

Question 19

For a very long time the country of Zeeland has had an inflation rate of 9%. Suddenly its inflation rate drops to 3%. The drop in the inflation rate
A)could be due to slower money supply growth. We would expect unemployment to be higher.
B)could be due to slower money supply growth. We would expect unemployment to be lower.
C)could be due to higher money supply growth. We would expect unemployment to be higher.
D)could be due to higher money supply growth. We would expect unemployment to be lower.

Accepted Answer

The answer of For a very long time the country...

Question 20

Germany could have avoided the high inflation that it experienced in the 1920s by
A)not directing so many of its resources toward preparation for World War II.
B)not increasing taxes so much on the German middle class.
C)not allowing the quantity of money to increase so rapidly.
D)using government policies to stimulate the economy more so than what was done.

Accepted Answer

Germany's high inflation in the 1920s was largely caused by the rapid increase in the quantity of money, which led to a devaluation of the currency. If the German government had not allowed the quantity of money to increase so rapidly, it could have avoided the high inflation. The other options, such as not directing resources toward preparation for World War II, not increasing taxes on the middle class, or using government policies to stimulate the economy more, were not the main causes of Germany's inflation in the 1920s.

Quiz 1: Ten Principles of Economics

Which of the following is the most correct statement about the relationship between inflation and unemployment?

In the short run, which of the following is not correct?

The business cycle is measured by the

In response to the deep economic downturn in the US in 2008 and 2009, the US

The irregular and largely unpredictable fluctuations in economic activity are called

Which of the following is the primary cause of inflation?

The mainstream view among economists is that

Which of the following is an important cause of inflation in an economy?

Low rates of inflation are generally associated with

The business cycle is the

The relatively low inflation experienced in the United States in the 1990s is attributable to

During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that

The short-run tradeoff between inflation and unemployment implies that, in the short run,

The combination of President Obama's strategies and the Federal Reserve's reaction to the deep economic downturn in the US in 2008 and 2009

The tradeoff between inflation and unemployment

Which of the following claims is consistent with the views of mainstream economists?

In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to observe during this short period of time?

For a very long time the country of Zeeland has had an inflation rate of 9%. Suddenly its inflation rate drops to 3%. The drop in the inflation rate

Germany could have avoided the high inflation that it experienced in the 1920s by