Chapter 35 Study Guide

Multiple Choice
1. In the short run
 * a. unemployment and inflation are positively related. In the long run, they are largely unrelated problems.
 * b. and in the long run, inflation and unemployment are positively related.
 * c. unemployment and inflation are negatively related. In the long run, they are largely unrelated problems.
 * d. and in the long run, inflation and unemployment are negatively related.
 * e. unemployment and inflation are negatively related. In the long run, they are largely positively related.

2. Refer to Figure 35-1. If the economy starts at B, then in the short run, a decrease in consumer confidence that decreases spending moves the economy to 3. Refer to Figure 35-1. Starting at point C, which combination of points would be correct for an economy that experienced a decrease in unemployment and a price level increase? 4. In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve, in the short run this change should have 5. The current view of the Phillip’s curve relationship is that 6. How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?
 * a. D and G.
 * b. C and G.
 * c. A and G.
 * d. D and F.
 * e. C and F.
 * a. D and G
 * b. D and F
 * c. A and F
 * d. A and G
 * e. B and F
 * a. reduced inflation and unemployment.
 * b. raised inflation and unemployment.
 * c. reduced inflation and raised unemployment.
 * d. raised inflation and reduced unemployment.
 * e. reduced unemployment and left unemployment unchanged.
 * a. the trade-off between inflation and unemployment does not apply in the long run.
 * b. the trade-off between inflation and unemployment does not apply in the short run.
 * c. the trade-off between inflation and unemployment does not apply in either the short run or the long run.
 * d. the trade-off between inflation and unemployment applies both in the short run and the long run.
 * e. the trade-off between inflation and unemployment applies only in the long run as in the short run there is no trade-off.
 * a. It would shift the long-run Phillips curve right.
 * b. It would shift the long-run Phillips curve left.
 * c. There would be an upward movement along a given long-run Phillips curve.
 * d. There would be a downward movement along a given long-run Philips curve.
 * e. There would be no effect on the long-run Phillips curve.

7. Refer to figure 35-2. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve? 8. An adverse supply shock will have which of the following combinations of events? Aggregate Supply Price Level Real Output 9. An adverse supply shock causes inflation to 10. Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally good conditions for growing crops. The good weather would 11. Disinflation is defined as a 12. During the middle and last part of the 1990s, both inflation and unemployment were low. In general, this could have been the result of
 * a. A, B
 * b. A, D
 * c. C, B
 * d. D, A
 * e. A, C
 * 1) A. shift right increase increase
 * 2) B. shift right increase decrease
 * 3) C. shift right decrease decrease
 * 4) D. shift left increase increase
 * 5) E. shift left increase decrease
 * a. A
 * b. B
 * c. C
 * d. D
 * e. E
 * a. rise and the short-run Phillips curve to shift right.
 * b. rise and the short-run Phillips curve to shift left.
 * c. fall and the short-run Phillips curve to shift right.
 * d. fall and the short-run Phillips curve to shift left.
 * e. fall and the long-run Phillips curve to shift right.
 * a. shift both the short-run aggregate supply and the short-run Phillips curve right.
 * b. shift both the short-run aggregate supply and the short-run Phillips curve left.
 * c. shift the short-run aggregate supply curve to the right, and the short-run Phillips curve to the left.
 * d. shift the short-run aggregate supply curve to the left, and the short-run Phillips curve to the right.
 * e. shift the short-run aggregate supply curve to the right, and cause a movement along the existing Phillips curve downward and to the right.
 * a. zero rate of inflation.
 * b. constant rate of inflation.
 * c. reduction in the rate of inflation.
 * d. negative rate of inflation.
 * e. high rate of inflation.
 * a. adverse supply shocks that shifted the short-run Phillips curve left.
 * b. adverse supply shocks that shifted the short-run Phillips curve right.
 * c. favorable supply shocks that shifted the short-run Phillips curve left.
 * d. favorable supply shocks that shifted the short-run Phillips curve right.
 * e. favorable supply shocks that shifted the long-run Phillips curve right.

Answers

 * C
 * B
 * E
 * D
 * A
 * B
 * B
 * E
 * A
 * C
 * C
 * C

Free Response
1. In the long run, what primarily determines the natural rate of unemployment? In the long run, what primarily determines the inflation rate?

2. Suppose that the prime minister and parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply. They make reforms to lower inflation from its current rate of 8 percent. Suppose further that the public is confident that with the reforms in place that inflation will fall to 2 percent. Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4 percent. Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6 percent, show the initial long-run equilibrium of Veridian and label it “A.” Assuming that the government had actually set inflation at 2 percent and that the public believed this, label the long-run equilibrium “B.” Now, suppose that inflation expectations fell to 2 percent and that the government unexpectedly created inflation of 4 percent. Show the short-run equilibrium and label it “C.” If the money supply continues to grow at a rate consistent with 4 percent inflation, show where the economy ends up and label that point “D.”