Test bank for macroeconomics 13th edition rudiger dornbusch stanley fischer richard startz

Test Bank for Macroeconomics, 13th Edition, Rudiger Dornbusch, Stanley Fischer Richard Start

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Macroeconomics, 13e (Dornbusch) Chapter 6 Aggregate Supply and the Phillips Curve 1) The theory of aggregate supply is one of the most controversial in macroeconomics because A) modern models, while similar in their starting points, reach widely different results in explaining the AS-curve B) economists cannot agree whether the Keynesian or the classical AS-curve is a better reflection of reality C) economists cannot agree whether wages are completely flexible or rigid in the long run D) economists cannot agree whether wages are completely flexible or rigid in the very short run E) economists do not completely agree on the reasons for the slow adjustment of wages and prices after demand-side disturbances Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 2) Friedman and Phelps argued that the Phillips curve is not stable over time because A) any kind of stabilization policy immediately affects nominal wages B) any shift in the aggregate demand curve immediately shifts the Phillips curve C) workers' expectations about price changes are only wrong temporarily D) firms change wage rates as soon as product prices change, so profits will not suffer E) firms always immediately change their product prices in response to a change in money supply Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 3) For many government decision makers, the original Phillips curve implied A) a trade-off between lowering unemployment at the cost of higher inflation or lowering inflation at the cost of higher unemployment B) that active stabilization policy will always work if applied correctly C) that severe recessions were a thing of the past, as unemployment could easily adjust to its natural rate D) that the natural rate of unemployment can be lowered by expansionary monetary policy E) all of the above Answer: A Difficulty: 1 Easy Accessibility: Keyboard Navigation

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4) If we look at the annual U.S. unemployment rates from 1959 to 2014, we see A) that it peaked in 1982, 1992, and 2008, each successive peak being higher than the previous one B) fairly small variations around the natural rate of 5.2% C) fairly large variations but with the rate quickly returning to about 4% after each peak D) that the unemployment rate exceeded 10% at least once E) that the unemployment rate never exceeded 9% Answer: D Difficulty: 1 Easy Accessibility: Keyboard Navigation 5) The original Phillips curve shows an inverse relationship between A) the level of output and prices B) the level of output and unemployment C) the level of prices and employment D) the rate of change in money wages and the rate of unemployment E) the level of prices and wage rate changes Answer: D Difficulty: 1 Easy Accessibility: Keyboard Navigation 6) According to the Phillips curve relationship, if unemployment is at the natural rate, then A) the rate of wage inflation will be zero B) nominal wages will always be equal to real wages C) labor supply will be totally price elastic D) prices will always immediately adjust to changes in money supply E) none of the above Answer: A Difficulty: 1 Easy Accessibility: Keyboard Navigation 7) The newer view of the Phillips curve implies that A) the natural rate of unemployment can be reduced by expansionary monetary policy B) in the long run unemployment does not move towards a natural rate if there is frictional unemployment C) an increase in monetary growth affects unemployment and inflation in the short run, but only affects inflation in the long run D) there is a clear inverse relationship between unemployment and output E) stagflation can best be addressed by implementing expansionary fiscal policies Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 2 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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8) The inflation-expectations-augmented Phillips curve implies that A) unemployment is at its natural rate when expected inflation is equal to actual inflation B) stagflation occurs when expected inflation is below actual inflation C) stagflation occurs when the short-run Phillips curve shifts left D) the inflation rate is equal to the real output growth rate plus the monetary growth rate E) the expected inflation rate is always equal to the monetary growth rate Answer: A Difficulty: 2 Medium Accessibility: Keyboard Navigation 9) Stagflation, that is, high unemployment combined with high inflation A) cannot persist, since the economy eventually will return to full employment B) can only occur if expansionary monetary policy is combined with restrictive fiscal policy C) is inconsistent with the inflation-expectations-augmented Phillips curve D) cannot occur as long as the expected inflation rate is above the actual inflation rate E) none of the above Answer: A Difficulty: 2 Medium Accessibility: Keyboard Navigation 10) The coordination approach to the Phillips curve focuses on the fact that A) administrations have problems coordinating fiscal policy with the monetary policy of the central bank B) long-term labor contracts tend to expire at different times, so firms cannot coordinate their hiring C) unemployed workers are not organized enough to influence wage negotiations D) firms are unsure about their competitors' behavior and are therefore reluctant to change wages and prices following a change in aggregate demand E) workers have only imperfect information about their real wages Answer: D Difficulty: 2 Medium Accessibility: Keyboard Navigation 11) The inverse relationship between inflation and unemployment is called A) Okun's law B) the Lucas curve C) the Phillips curve D) the replacement ratio E) the sacrifice ratio Answer: C Difficulty: 1 Easy Accessibility: Keyboard Navigation 3 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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12) A difference between the inflation-expectations-augmented Phillips curve and the Phillips curve that is based on rational expectations is that A) in the latter people never make incorrect forecasts B) in the latter monetary policy changes cannot affect the rate of inflation C) in the former a change in monetary policy causes an immediate shift in the Phillips curve D) in the former expected inflation is always equal to actual inflation E) none of the above Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 13) The insider-outsider model refers to A) policy making in White House B) the fact that the unemployed do not take part in collective bargaining C) the fact that wages do not respond significantly to changes in the unemployment rate D) slow price adjustments in an imperfectly competitive business environment E) both B and C Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 14) The unemployment gap A) always grows twice as fast as the output gap B) always is negative C) always increases as the rate of inflation increases D) always stays at its natural level E) none of the above Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 15) In the coordination approach to the Phillips curve, wages are considered to be sticky rather than flexible since A) firms encounter menu costs when changing wages but not when changing prices B) labor contracts contain cost-of-living adjustments C) firms tend to look at labor as an expendable resource D) firms are unsure about their competitors' behavior and only reluctantly change prices and wages following a change in aggregate demand E) all of the above Answer: D Difficulty: 2 Medium Accessibility: Keyboard Navigation 4 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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16) Which of the following is NOT true for the expectations-augmented Phillips curve?

A) the short-run curve shifts with changes in inflationary expectations B) the position of the curve depends on the expected rate of inflation C) if actual inflation is equal to expected inflation, we are at full-employment D) if unemployment is below its natural rate, the curve will shift to the right E) if wages and prices don't respond to changes in unemployment, the curve is vertical Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 17) The fact that nominal wages are fixed by a contract at the beginning of a period while the prices of goods may change within the period implies that A) unanticipated changes in the money supply do not affect the level of output B) there is no trade-off between unemployment and inflation C) firms want to supply more output when prices increase since the real wage rate is lower D) anticipated monetary policy changes will not affect the level of inflation E) changes in money supply affect prices but not unemployment in the short run Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 18) The efficiency wage theory of aggregate supply implies that A) the AS-curve is vertical B) paying employees higher wages won't induce them to work harder C) even unanticipated changes in monetary or fiscal policy have no effect on the level of output D) since the cost of changing wages and prices is low, wages can easily be adjusted in proportion to price changes to maintain full employment E) none of the above Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 19) Which of the following is NOT used in deriving the AS-curve in Chapter 6?

A) the link between output and employment B) the price-cost relation C) the Phillips curve D) the quantity theory of money E) all of the above are used Answer: D Difficulty: 2 Medium Accessibility: Keyboard Navigation

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20) The upward-sloping AS-curve will shift eventually to the left if A) labor productivity increases B) actual output is lower than the full-employment level C) actual output is higher than the full-employment level D) the markup over labor cost falls E) the level of potential output increases Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 21) Restrictive monetary policy will eventually affect the upward-sloping AS-curve since A) higher interest rates will increase the cost of production B) higher interest rates will reduce the capital stock which will, in turn, reduce potential GDP C) the resulting unemployment will cause downward pressure on nominal wages, so the cost of production will decrease D) real wages will decline while nominal wags remain constant E) firms will start laying off workers in anticipation of a decline in aggregate demand Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 22) Assume output is at its full-employment level and the Fed restricts money supply. What is the most likely outcome?

A) an immediate decrease in prices, with no impact on output B) no change in nominal wages in the short run, but a decline in output and prices in the medium run C) no change in real wages, but a decline in output and prices in the medium run D) a decrease in nominal wages and prices in proportion to money supply, but no change in output and real interest rates in the long run E) both B and D Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation

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23) Assume the economy is at full employment. Which is the most likely effect of a decrease in government spending?

A) output, prices, and interest rates will all increase in the medium run B) output, prices, and interest rates will all decrease in the long run C) prices and interest rates will decrease in the medium and long run while output will be negatively affected in the medium run but not in the long run D) output and prices will remain the same in the long run, but interest rates will increase both in the medium and long run E) output, prices and interest rates will all decline in the medium run but only output will be negatively affected in the long run Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 24) In the short run, a price increase combined with a decrease in the unemployment rate is most likely to be the result of A) an adverse supply shock B) an adverse supply shock followed by a restrictive monetary policy C) a favorable supply shock D) a decrease in money supply E) an expansionary fiscal or monetary policy Answer: A Difficulty: 1 Easy Accessibility: Keyboard Navigation 25) In the long run, monetary expansion should have the following result: A) nominal wages change in proportion to nominal money supply B) real interest rates remain constant C) real wages remain constant D) nominal wages and prices change in proportion to nominal money supply E) all of the above Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation

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26) In the AD-AS model with an upward-sloping AS-curve, what would happen if oil prices increased and the Fed responded by restricting money supply?

A) real output would increase, and the price level would remain the same B) real output would remain the same, but the price level would decrease C) real output would decrease, and the price level would increase sharply D) real output would decrease, and the price level would decrease sharply E) real output would decrease, but we cannot tell what would happen to the price level Answer: E Difficulty: 1 Easy Accessibility: Keyboard Navigation 27) What sort of event could lead to a simultaneous decrease in the rates of inflation and unemployment?

A) a decrease in money supply B) an increase in money supply C) an adverse supply shock D) a decrease in material prices E) restrictive monetary policy following an adverse supply shock Answer: D Difficulty: 2 Medium Accessibility: Keyboard Navigation 28) In the static AD-AS model, what is the most likely long-run outcome of an oil price increase, if no policy change is implemented?

A) real wages will decline while the levels of output and prices will remain unchanged B) the level of prices will increase while the level of output will remain unchanged C) the natural unemployment rate and the price level will both increase D) nominal wages and prices will increase, but real wages will remain unchanged E) real money balances and real wages will decline while nominal wages will remain unchanged Answer: A Difficulty: 2 Medium Accessibility: Keyboard Navigation 29) In the AD-AS model with an upward-sloping AS-curve, a decrease in oil prices will A) increase prices and output in the long run B) decrease prices and increase output in the short run C) increase prices and decrease output in the long run D) decrease prices and output in the short run E) decrease prices but have no effect on output in the short run Answer: B Difficulty: 1 Easy Accessibility: Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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30) Which of the following is the most likely medium-run outcome of an adverse supply shock?

A) an increase in consumer prices and a higher level of real GDP B) a decrease in real GDP C) an increase in real wage rates D) an increase in frictional unemployment E) an increase in nominal GDP with real GDP remaining the same Answer: B Difficulty: 1 Easy Accessibility: Keyboard Navigation 31) Suppose an increase in oil prices is accompanied by a decline in the level of potential output.

Which of the following is the most likely long-run effect?

A) real GDP will decrease but prices will increase B) real GDP and prices will both decline C) real GDP will remain the same but prices will increase D) real GDP will remain the same but nominal GDP will decrease E) the unemployment rate and prices will both decrease Answer: A Difficulty: 2 Medium Accessibility: Keyboard Navigation 32) If policy makers want to get the price level quickly back to its original level following an adverse supply shock, they need to A) implement restrictive monetary policy B) decrease taxes C) increase government transfer payments D) combine a tax increase with an increase in government spending of equal magnitude E) levy a tariff on imported oil Answer: A Difficulty: 2 Medium Accessibility: Keyboard Navigation 33) If the government stimulates aggregate demand in response to a permanent adverse supply shock A) the inflation rate will increase but frictional unemployment will decrease B) the unemployment rate will increase but the inflation rate will decline C) an increase in unemployment can be avoided but only at the cost of increased inflation D) high inflation can be avoided but the rate of unemployment will increase E) the inflation and the unemployment rates will reduce simultaneously Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 9 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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34) Assume the economy is at full employment. If the Fed accommodates an increase in oil prices by expansionary monetary policy, the most likely long-run effect will be that A) unemployment and prices will both increase B) unemployment will decrease and prices will remain the same C) unemployment will increase but prices will remain the same D) unemployment and prices will both remain unchanged E) unemployment will remain the same but prices will increase Answer: E Difficulty: 2 Medium Accessibility: Keyboard Navigation 35) The real (inflation adjusted) price of crude oil A) nearly doubled between 1978 and 1981 B) was lower in 1998 than in 1980 C) in 2008 was almost the same as in 1980 D) increased more than fourfold between 1998 and 2008 E) all of the above Answer: E Difficulty: 1 Easy Accessibility: Keyboard Navigation 36) In the long run, what event(s) can lead to an increase in inflation without changing the unemployment rate above its natural level?

A) a tax decrease combined with a government spending decrease B) an increase in government spending combined with restrictive monetary policy C) an adverse supply shock D) an adverse supply shock accommodated by expansionary monetary policy E) a favorable supply shock Answer: D Difficulty: 2 Medium Accessibility: Keyboard Navigation 37) The sacrifice ratio is defined as A) the percentage of output lost for every 1 percent increase in the unemployment rate B) the percentage increase in the unemployment rate for every 1 percent reduction in GDP C) the percentage of output lost for each 1 percent reduction in the rate of inflation D) the inflation rate plus the unemployment rate E) the inflation rate divided by the unemployment rate Answer: C Difficulty: 1 Easy Accessibility: Keyboard Navigation

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38) Which of the following event(s) most likely will leave prices relatively unchanged while increasing output?

A) an increase in money supply combined with an income tax increase B) expansionary monetary policy in response to an adverse supply shock C) expansionary fiscal policy employed after a favorable supply shock D) restrictive monetary policy in response to an oil price decrease E) none of these Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 39) If we look at the sacrifice ratios across countries, we find that A) all industrial nations have approximately the same ratio B) Japan has a smaller ratio than Germany, France, or the U.S. C) Germany has a higher ratio than Italy, Australia, or the U.S. D) no country has a ratio below 1 E) no country has a ratio above 1 Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 40) Okun's law states that one extra percentage point in unemployment causes A) a 2 percent fall in GDP B) a 0.5 percent fall in GDP C) a 2 percent fall in the rate of inflation D) a 0.5 percent fall in the rate of inflation E) a 2 percent increase in the sacrifice ratio Answer: A Difficulty: 1 Easy Accessibility: Keyboard Navigation 41) The misery index is constructed by A) adding the inflation rate and the unemployment rate B) multiplying the inflation rate with the unemployment rate C) dividing the inflation rate by the unemployment rate D) adding the sacrifice ratio and the replacement rate E) combining the sacrifice ratio with the unemployment rate Answer: A Difficulty: 1 Easy Accessibility: Keyboard Navigation

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Test Bank for Macroeconomics, 13th Edition, Rudiger Dornbusch, Stanley Fischer Richard Start

42) The misery index for the United States A) increased steadily from 1950 to 1990, but has since declined B) is closely but inversely related to the successes of the incumbent party C) is closely and positively related to the successes of the incumbent party D) is only loosely and inversely related to the successes of the incumbent party E) none of the above Answer: D Difficulty: 1 Easy Accessibility: Keyboard Navigation 43) A change in the misery index A) may indicate a change in the chances of an incumbent to get re-elected B) may arise from a change in the inflation rate even if unemployment remains constant C) is likely to occur if the economy experiences a positive supply shock D) all of the above E) none of the above Answer: D Difficulty: 1 Easy Accessibility: Keyboard Navigation 44) Political business cycles consist of fluctuations caused by A) misguided foreign policies designed to increase political pressure over our trade partners B) economic policies designed to help win elections C) the Fed trying to support every policy proposed by the president D) our trade partners trying to react to changes in U.S. policies E) the inability of politicians to agree on the right policy mix Answer: B Difficulty: 1 Easy Accessibility: Keyboard Navigation 45) Predictions based on the theory of political business cycles suggest that A) presidents who succeed in reducing inflation sharply before an election have the best chance to be re-elected even if unemployment increases B) achieving a low rate of unemployment before an election is less important than achieving a low rate of inflation C) presidents who want to be re-elected should aim for low inflation early in their terms and then try to achieve strong economic growth before the next election D) the practice of manipulating the economy before an election seldom pays off since voter behavior is not significantly affected by economic issues E) none of the above Answer: C Difficulty: 2 Medium Accessibility: Keyboard Navigation 12 Copyright © 2019 McGraw-Hill Education. All rights reserved.

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