EC 305-Exam1-Ch6 Word Scramble
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| Question | Answer |
| The theory of aggregate supply is one of the most controversial in macroeconomics because | economists do not completely agree on the reasons for the slow adjustment of wages and prices after demand-side disturbances |
| Friedman and Phelps argued that the Phillips curve is not stable over time because | workers' expectations about price changes are only wrong temporarily |
| For many government decision makers, the original Phillips curve implied | a trade-off between lowering unemployment at the cost of higher inflation or lowering inflation at the cost of higher unemployment |
| If we look at the annual U.S. unemployment rates over the last three decades, we see | that the unemployment rate exceeded 10% in 1982 |
| The Phillips curve shows a relationship between | rate of change in prices and the rate of unemployment |
| According to the Phillips curve relationship, if unemployment is at the natural rate, then | -the rate of inflation is zero -nominal wages will always be equal to real wages -the labor supply will be totally price elastic -prices will always immediately adjust to changes in money supply E)none of the above |
| The newer view of the Phillips curve implies that | an increase in monetary growth affects unemployment and inflation in the short run, but only affects inflation in the long run |
| The coordination approach to the Phillips curve focuses on the fact that | firms are unsure about their competitors' behavior and are therefore reluctant to change wages and prices following a change in aggregate demand |
| The inflation-expectations-augmented Phillips curve implies that | unemployment is at its natural rate when expected inflation is equal to actual inflation |
| Stagflation, that is, high unemployment combined with high inflation | cannot persist, since the economy eventually will return to full employment |
| The natural rate of unemployment is | the result of labor market friction--people entering the labor force, changing careers, etc. |
| A difference between the inflation-expectations-augmented Phillips curve and the Phillips curve that is based on rational expectations is that | -in lttr pple never make incorrect forecasts -in lttr mntry plcy chng cant affect rate of infl -in frmr change in monetary policy causes an immediate shift in Phillips curve -in frmr expctd infl is always equal to actual infl E)none of the above |
| The rational expectations hypothesis predicts that | -anncd change in monetary policy will not affect the unemployment rate -sht-run Phillips curve will shift as soon as new info about future infl becomes available -level of output will not be affected by any predictable change in mntry plcy D)all |
| If nominal wage rates were completely flexible, then | fiscal policy would affect real money balances but not output |
| The insider-outsider model refers to | -the fact that the unemployed do not take part in collective bargaining -the fact that wages do not respond significantly to changes in the unemployment rate |
| Wages are considered to be sticky rather than flexible since | firms are unsure about their competitors' behavior and only reluctantly change prices and wages following a change in aggregate demand |
| The efficiency wage theory of aggregate supply implies that | -the AS-curve is vertical -paying emply higher wages won't induce them to work harder -even unanticipated changes in monetary or fiscal policy have no effect on the level of output E)none |
| The inverse relationship between inflation and unemployment is called | the Phillips curve |
| Okun's law states that one extra percentage point in unemployment causes | real GDP to fall by about 2 percent |
| Robert Lucas modified the rational expectations argument by | allowing for the role of forecasting errors |
| Restrictive monetary policy will eventually affect the upward-sloping AS-curve since | the resulting unemployment will cause downward pressure on nominal wages, so the cost of production will decrease |
| In the medium run the aggregate supply curve is upward sloping since | firms encounter costs in resetting prices and are reluctant to change wages following a change in aggregate demand |
| The fact that nominal wages are fixed by a contract at the beginning of a period while prices of goods may change within that period, implies that | firms want to supply more output when prices increase since the real wage rate is lower |
| The unemployment gap | -always grows twice as fast as the output gap -always is negative -always increases as the rate of inflation increases -always stays at its natural level E)none of the above |
| Which of the following is NOT used in deriving the AS-curve in Chapter 6? | the quantity theory of money |
| The upward-sloping AS-curve will shift eventually to the left if | actual output is higher than the full-employment level |
| Which of the following is NOT true? | the Phillips curve shifts as soon as actual inflation changes |
| Assume the Fed implements restrictive monetary policy. Which of the following is the most likely result in an AD-AS framework with an upward sloping AS-curve? | the interest rate will increase but output, prices, and real money balances will fall |
| In an AD-AS model with an upward-sloping AS-curve, the most likely effects of fiscal expansion would be | an increase in prices and interest rates, but a decrease in real money balances |
| In the medium run, a price increase combined with a decrease in the unemployment rate is most likely the result of | expansionary fiscal or monetary policy |
| Assume output is at its full-employment level and the Fed restricts money supply. What is the most likely outcome? | -no change in nominal wages in the short run, but a decline in output and prices in the medium run -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 |
| Assume the economy is at full employment. Which is the most likely effect of a decrease in government spending? | 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 |
| Assume the economy is at full employment and the Fed restricts money supply. What will be the effects on output and prices? | in the medium run output and prices will both decrease, but in the long run output will remain the same, while prices will decrease |
| The most likely long-run result of a tax cut would be | more consumption and less investment, with output remaining unchanged |
| In the long run, real money balances | are not affected by restrictive monetary policy, but increase if restrictive fiscal policy is employed |
| In the long run, monetary expansion should have the following result: | -nominal wages change in proportion to nominal money supply -real interest rates remain constant -real wages remain constant -nominal wages and prices change in proportion to nominal money supply E)all of the above |
| In an AD-AS model with an upward sloping AS-curve, what would happen if oil prices increased and the Fed responded by restricting money supply? | real output would decrease but we can't tell what would happen to the price level |
| What sort of event could lead to a simultaneous decrease in the rates of inflation and unemployment? | a decrease in material prices |
| 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? | real wages will decline while the levels of output and prices will remain unchanged |
| In the AD-AS model with an upward-sloping AS-curve, a decrease in oil prices will | decrease prices and increase output |
| Which of the following is the most likely medium-run outcome of an adverse supply shock? | a decrease in real GDP |
| 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? | real GDP will decrease but prices will increase |
| If policy makers want to get the price level quickly back to its original level following an adverse supply shock, they need to | implement restrictive monetary policy |
| In the 1990s, the consumer price index | increased slightly despite a drastic decrease in computer prices |
| If the government stimulates aggregate demand in response to an adverse supply shock, | an increase in unemployment can be avoided but only at the cost of increased inflation |
| Assume the economy is at full employment. If the Fed accommodates an increase in oil prices by expansionary monetary policy, what will be the long-run effects on unemployment and prices? | unemployment will remain the same but prices would increase |
| When we look at the real (inflation adjusted) price of crude oil over the last four decades, we realize that | -oil prices doubled between 1971 and 1974 -oil prices did not change much between 1974 and 1978 -oil prices more than doubled between 1978 and 1981 -oil prices were lower in 1998 than in 1978 E)all of the above |
| In the long run, an increase in nominal money supply will | cause both the nominal wage rate and the price level to rise proportionately, leaving the real wage rate and output unchanged |
| In the long run, what event(s) can lead to an increase in inflation without changing the unemployment rate above its natural level? | an adverse supply shock accommodated by expansionary monetary policy |
| Which of the following event(s) most likely will leave prices relatively unchanged while increasing output? | expansionary fiscal policy employed after a favorable supply shock |
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