Chapter:
Inflation and Growth: The Phillips Curve
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1. Which of the following is true about the economy depicted in the figure above?
a. Tax incentives are being used to stimulate aggregate supply.
b. Policymakers believe the costs of unemployment are higher than the costs of inflation
c. Contractionary monetary policy is being enacted to fight inflation.
d. Prices are rising but real GDP is falling.
2. The origin of the Phillips curve is the idea that
a. an increase in AD will lead to more inflation and more unemployment.
b. an increase in AD will lead to more inflation and lower unemployment.
c. an increase in AS will lead to lower inflation and lower unemployment.
d. an increase in AS will lead to less inflation and higher unemployment.
3. One reason why the Phillips curve "broke down" is
a. most of the inflation of the 1970s was from the demand side.
b. most of the inflation of the 1970s was from the supply side.
c. the inflation of the 1970s was foreseen, unlike the inflation of the 1980s.
d. the inflation of the 1970s was purely random and could not be explained with economic theor
4. If the economy is fully employed, then the inflation costs of expansionary policy are likely to be
a. high, and the employment gains minimal.
b. high, and the employment gains large.
c. low, and the employment gains minimal.
d. low, and the employment gains large.
5. In the figure above, which of the following points illustrate the expansionary monetary policies of the mid-1990s and the accompanying favorable supply shocks?
a. A to B to C
b. B to C to E
c. C to B to A
d. D to C to E
6. If policymakers do nothing in a recessionary gap, the most likely outcome is
a. a drop in the inflation rate and a rise in the unemployment rate.
b. a drop in the inflation rate and a drop in the unemployment rate.
c. a rise in the inflation rate and a drop in the unemployment rate.
d. a rise in the inflation rate and a rise in the unemployment rate.
7. Many economists think that, in the long run, the economy tends to move toward
a. the natural or full-employment rate of unemployment.
b. the natural or full-employment rate of inflation.
c. a severe slump with high unemployment.
d. an accelerating rate of inflation.
8. The theory of rational expectations says that
a. workers make excellent choices of places to work.
b. workers make the best possible forecasts of inflation.
c. economists make rational expectations of inflation.
d. economists expect workers to be rational.
9. Most economists think that, in the short run
a. there is a trade-off between inflation and unemployment, but not in the long run.
b. there is no trade-off between inflation and unemployment, nor is there one in the long run.
c. there is a trade-off between inflation and unemployment, and in the long run also.
d. there is no trade-off between inflation and unemployment, but there is one in the long run also.
10. The intent of indexing is to
a. raise tax revenue automatically during inflation.
b. shift the short-run Phillips curve to the right.
c. take most of the sting out of inflation.
d. reduce inflation gradually.
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