Question 1

Supply-side inflation will increase the price level and reduce real GDP.

Accepted Answer

Supply-side inflation occurs when the costs of production increase, such as the cost of raw materials or wages. This results in producers increasing their prices to maintain profit margins, which leads to an increase in the price level. However, since the higher costs of production also reduce the overall supply of goods and services in the economy, this can lead to a reduction in real GDP. Therefore, both of these effects can occur simultaneously from supply-side inflation.

Question 2

The supply-side shocks of the 1970s shifted the aggregate supply curve inward.

Accepted Answer

The supply-side shocks of the 1970s, which included oil price increases and disruptions to production, caused a decrease in the supply of goods and services, leading to a shift inward of the aggregate supply curve. This resulted in higher prices and lower output levels.

Question 3

The economy's self-correcting mechanism ensures that neither recessionary nor inflationary gaps will be eliminated eventually.

Accepted Answer

True

Question 4

The cure for inflation can come only from changes on the demand side.

Accepted Answer

The cure for inflation can come from both supply-side and demand-side changes. Supply-side changes can include increasing production and lowering prices, while demand-side changes can include decreasing aggregate demand through government policies such as increasing taxes or reducing government spending. Therefore, both supply and demand-side changes are necessary to combat inflation.

Question 5

Demand-side inflation is usually accompanied by increasing real GDP, while supply-side inflation is usually accompanied by falling real GDP.

Accepted Answer

Demand-side inflation occurs when there is excessive demand for goods and services, causing prices to rise. This usually happens when the economy is growing, leading to an increase in real GDP. On the other hand, supply-side inflation occurs when there are cost-push factors such as rising input costs or reduced productivity, which leads to a decrease in the supply of goods and services. This usually leads to a fall in real GDP.

Question 6

An economy eliminates a recessionary gap by reducing wages and prices.

Accepted Answer

When there is a recessionary gap in an economy, it means that the actual output is below the potential level of output. To eliminate this gap and increase output, firms may reduce wages and prices, which would lower their costs of production and encourage more spending by consumers. As a result, the economy would move towards full employment and stabilize.

Question 7

The U.S.economy in the 1990s benefited from an aggregate supply curve shifting outward.

Accepted Answer

The U.S. economy in the 1990s experienced a period of economic growth and low inflation, attributed in part to technological advancements and increased productivity. This led to an increase in aggregate supply, which shifted the aggregate supply curve outward to the right.

Question 8

The Phillips curve shows the relationship between the rate of inflation and the rate of growth of real GDP.

Accepted Answer

The Phillips curve illustrates the inverse relationship between the rate of inflation and the rate of unemployment, not the growth of real GDP.

Question 9

If the U.S.economy had grown faster than it actually did from 2009 to 2010, the unemployment rate would have been higher.

Accepted Answer

This statement is logically incorrect. If the economy had grown faster, there would have been more job opportunities, leading to a decrease in the unemployment rate.

Question 10

Expansionary fiscal and monetary policy from 2008 to 2010, took the risk of being inflationary for the sake of avoiding additional unemployment.

Accepted Answer

Expansionary fiscal and monetary policies involve increasing government spending and lowering interest rates to stimulate economic activity. These policies can lead to inflation if there is too much money flowing in the economy. However, during the period from 2008 to 2010, the main concern was avoiding further unemployment, and policymakers were willing to take the risk of inflation in order to achieve that goal.

Question 11

An inflationary gap will eliminate itself through a process of price increases.

Accepted Answer

An inflationary gap occurs when aggregate demand exceeds potential output, leading to upward pressure on prices. As prices increase, consumption will decrease and producers will increase output, which will bring the economy closer to its potential output and eventually eliminate the inflationary gap. Therefore, an inflationary gap will eliminate itself through a process of price increases.

Question 12

The Phillips curve explains the trade-off between inflation and unemployment.

Accepted Answer

The Phillips curve depicts the inverse relationship between unemployment and inflation. The theory suggests that as unemployment decreases, inflationary pressures increase and vice versa. However, the relationship may not hold in the long run as there may be supply-side factors at play that affect both unemployment and inflation.

Question 13

In 2010 the U.S.economy's inflation rate was higher than its unemployment rate.

Accepted Answer

In 2010, the U.S. unemployment rate was at 9.6% while the inflation rate was around 1.2%. Therefore, the inflation rate was lower than the unemployment rate.

Question 14

The Phillips curve assumes that shocks to the economy come from the demand side.

Accepted Answer

The Phillips curve is a macroeconomic concept that shows the inverse relationship between unemployment and inflation. It assumes that changes in aggregate demand (e.g. fiscal or monetary policy) can affect the level of employment in the short-run, leading to changes in the rate of inflation. As a result, the Phillips curve is often associated with demand-side policies such as government spending or interest rate adjustments. However, it is worth noting that other factors such as supply shocks or structural changes in the economy can also affect the performance of the Phillips curve.

Question 15

In December of 2007, with an unemployment rate of 5.0 percent, most economists believed this was above the natural rate.

Accepted Answer

The natural rate of unemployment is the rate of unemployment that exists when the labor market is in equilibrium and there is no cyclical unemployment. In December of 2007, the unemployment rate was at the natural rate or slightly below it, as it was a period of economic expansion and low unemployment. Therefore, most economists believed that the unemployment rate was below the natural rate.

Question 16

A stimulus to aggregate demand will normally pull prices up but cause a reduction in output.

Accepted Answer

This statement is incorrect. A stimulus to aggregate demand, such as an increase in government spending or a tax cut, will generally lead to an increase in both prices and output in the short run, as firms respond to the higher demand by producing more goods and services. However, over the longer term, the increased demand can push up inflation and lead to a decrease in output if firms are unable to keep up with the increased demand or if resources become scarce.

Question 17

Every year from 1954 to 1984, the U.S.economy was characterized by higher output and lower prices.

Accepted Answer

This statement is false. The period from 1954 to 1984, known as the post-World War II boom, was characterized by higher output and higher prices. This period saw significant economic growth and rising inflation, with prices increasing at an average annual rate of 4.2% during this time.

Question 18

If aggregate demand grows faster than aggregate supply, the equilibrium price level will rise.

Accepted Answer

This is because with higher demand relative to supply, sellers can charge higher prices for their goods and services, resulting in an increase in overall price level in the economy.

Question 19

The natural rate of unemployment corresponds to what is sometimes called the full employment unemployment rate.

Accepted Answer

The natural rate of unemployment is the rate at which the labor market is in equilibrium, with all available job openings being filled and workers finding suitable employment. At this rate, there is no cyclical unemployment, only frictional and structural unemployment remain. It is often considered to be the rate of unemployment associated with full employment, as the economy is operating at its potential and there is little room for further reductions in unemployment without creating inflationary pressures.

Question 20

Inflation can come from the demand side or from the supply side of the economy.

Accepted Answer

Demand-pull inflation happens when the aggregate demand in an economy exceeds its aggregate supply, putting upward pressure on prices. On the other hand, cost-push inflation occurs when the prices of production inputs, such as labor or raw materials, increase and lead to higher prices for finished goods and services. Both factors can contribute to inflation in an economy.

Quiz 34: The Trade-Off Between Inflation and Unemployment