Quiz 541

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Quiz 541

1. An event that directly affects firms’ costs of production and thus the prices they charge is
called
a. a Phillips contraction.
b. an inflationary spiral.
c. a demand shock.
d. a supply shock.

2. Which of the following is an example of an adverse supply shock?

a. a decrease in the money supply
b. a tax cut
c. a worldwide drought
d. decreased government spending

3. An adverse supply shock will shift short-run aggregate supply

a. right, making prices rise.
b. left, making prices rise.
c. right, making prices fall.
d. left, making prices fall.

4. An adverse supply shock will cause output

a. and prices to rise.
b. and prices to fall.
c. to rise and prices to fall.
d. to fall and prices to rise.

5. Which of the following results in higher inflation and higher unemployment in the short run?
a. a more expansionary monetary policy
b. a more contractionary monetary policy
c. a decrease in the minimum wage
d. an adverse supply shock such as an increase in the price of oil

6. Which of the following is not associated with an adverse supply shock?

a. the short-run Phillips curve shifts left
b. unemployment rises
c. the price level rises
d. output falls

7. If there is an adverse supply shock, then

a. unemployment rises and the short-run Phillips curve shifts right.
b. unemployment rises and the short-run Phillips curve shifts left.
c. unemployment falls and the short-run Phillips curve shifts right.
d. unemployment falls and the short-run Phillips curve shifts left.

8. An adverse supply shock causes inflation to

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.

9. Which of the following is correct if there is an adverse supply shock?

a. The short-run aggregate supply curve and the short-run Phillips curve both shift right.
b. The short-run aggregate supply curve and the short-run Phillips curve both shift left.
c. The short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
d. The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.

10. When they are confronted with an adverse shock to aggregate supply, policymakers face a
difficult choice in that
a. if they contract aggregate demand, the unemployment rate will increase further.
b. if they expand aggregate demand, the inflation rate will increase further.
c. they face a less favorable trade-off between inflation and unemployment than they did before
the shock.
d. All of the above are correct.

Figure 35-9. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two
aggregate-demand (AD) curves. On the right-hand diagram, “Inf Rate” means “Inflation Rate.”

11. Refer to Figure 35-9. What is measured along the horizontal axis of the right-hand graph?
a. time
b. the unemployment rate
c. real GDP
d. the growth rate of real GDP

12. Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2
a. results in a more favorable trade-off between inflation and unemployment.
b. results in a more favorable trade-off between inflation and the growth rate of real GDP.
c. represents an adverse shock to aggregate supply.
d. represents a favorable shock to aggregate supply.

13. Refer to Figure 35-9. Which of the following events could explain the shift of the aggregate-
supply curve from AS1 to AS2?
a. a reduction in firms’ costs of production
b. a reduction in taxes on consumers
c. an increase in the price level
d. an increase in the world price of oil

14. Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2 could be a
consequence of
a. an increase in the money supply.
b. an adverse supply shock.
c. a decrease of output from Y1 to Y2.
d. a slow adjustment of people’s expectation of the inflation rate.

15. Refer to Figure 35-9. A significant increase in the world price of oil could explain
a. the shift of the aggregate-supply curve from AS1 to AS2, but it could not explain the shift of
the Phillips curve from PC1 to PC2.
b. the shift of the Phillips curve from PC1 to PC2, but it could not explain the shift of the
aggregate-supply curve from AS1 to AS2.
c. both the shift of the aggregate-supply curve from AS1 to AS2 and the shift of the Phillips
curve from PC1 to PC2.
d. neither the shift of the aggregate-supply curve from AS1 to AS2 nor the shift of the Phillips
curve from PC1 to PC2.

16. Refer to Figure 35-9. Faced with the shift of the Phillips curve from PC1 to PC2,
policymakers will
a. ask whether the shift is temporary or permanent.
b. be concerned with how people adjust their expectations of inflation as a result of the shift.
c. face, as well, a decision as to whether to accommodate the shock.
d. All of the above are correct.

17. Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the
curve will soon shift back to PC1 if people perceive the
a. increase in the inflation rate as a temporary aberration.
b. economic boom as a temporary aberration.
c. increase in the inflation rate as a sign of a new era of higher inflation.
d. economic boom as a sign of a new era of higher economic growth.

18. Refer to Figure 35-9. A movement of the economy from point A to point B, and at the same
time a movement from point C to point D, would be described as
a. the outcome of a favorable supply shock.
b. falling inflation.
c. stagflation.
d. All of the above are correct.

19. A favorable supply shock causes the price level to

a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.

20. A favorable supply shock causes output to

a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.

21. An adverse supply shock causes output to

a. rise. To counter this a central bank would increase the money supply.
b. rise. To counter this a central bank would decrease the money supply.
c. fall. To counter this a central bank would increase the money supply.
d. fall. To counter this a central bank would decrease the money supply.

22. If a central bank wants to counter the change in the price level caused by an adverse supply
shock, it could change the money supply to shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.

23. If a central bank increases the money supply in response to an adverse supply shock, then
which of the following quantities moves closer to its pre-shock value as a result?
a. both the price level and output
b. the price level but not output
c. output but not the price level
d. neither output nor the price level

24. If a central bank decreases the money supply in response to an adverse supply shock, then
which of the following quantities moves closer to its pre-shock value as a result?
a. both the price level and output
b. the price level but not output
c. output but not the price level
d. neither output nor the price level

25. If there is an adverse supply shock and the Federal Reserve responds by increasing the
growth rate of the money supply, then in the short run the Federal Reserve’s action
a. lowers both inflation and unemployment.
b. lowers inflation but raises unemployment.
c. raises inflation but lowers unemployment.
d. raises both inflation and unemployment.

26. If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the
a. right. It remains to the right regardless of monetary policy.
b. right. It remains to the right if the central bank pursues expansionary monetary policy.
c. left. It remains to the left regardless of monetary policy.
d. left. It remains to the left if the central bank pursues expansionary monetary policy.

27. If policymakers accommodate an adverse supply shock, then in the short run the
unemployment rate
a. and the inflation rate rise.
b. and the inflation rate fall.
c. rises and the inflation rate falls.
d. falls and the inflation rate rises.

28. A central bank that accommodates an aggregate supply shock

a. increases the money supply, making the inflation rate rise.
b. increases the money supply, making the inflation rate fall.
c. decreases the money supply, making the inflation rate rise.
d. decreases the money supply, making the inflation rate fall.

29. Which of the following shifts aggregate supply to the right?

a. a decline in the price of imported natural resources
b. a technological advance
c. an older labor force that leaves jobs less frequently
d. All of the above are correct.

30. Which of the following would not be associated with a favorable supply shock?
a. the short-run Phillips curve shifts left
b. unemployment falls
c. the price level rises
d. output rises.

31. A favorable supply shock will shift short-run aggregate supply

a. left, making output rise.
b. left, making output fall.
c. right, making output rise.
d. right, making output fall.

32. A favorable supply shock will cause the price level

a. and output to rise.
b. and output to fall.
c. to rise and output to fall.
d. to fall and output to rise.
33. A favorable supply shock will cause
a. unemployment to rise and the short-run Phillips curve to shift right.
b. unemployment to rise and the short-run Phillips curve to shift left.
c. unemployment to fall and the short-run Phillips curve to shift right.
d. unemployment to fall and the short-run Phillips curve to shift left.

34. A favorable supply shock will cause inflation to

a. rise and shift the short-run Phillips curve right.
b. rise and shift the short-run Phillips curve left.
c. fall and shift the short-run Phillips curve right.
d. fall and shift the short-run Phillips curve left.

35. Which of the following is correct if there is a favorable supply shock?

a. the short-run aggregate supply curve and the short-run Phillips curve both shift right.
b. the short-run aggregate supply curve and the short-run Phillips curve both shift left.
c. the short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
d. the short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.

36. Suppose that a small economy that produces mostly agricultural goods experiences a year
with exceptionally good conditions for growing crops. The good weather would
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.

37. Which of the following would cause the price level to rise and output to fall in the short run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock

38. Which of the following would cause the price level to fall and output to rise in the short run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock

39. The large increase in oil prices in the 1970s was caused primarily by a(n)
a. increase in demand for oil.
b. decrease in demand for oil.
c. decrease in the supply of oil.
d. increase in the supply of oil.
40. In the United States during the 1970s, expected inflation
a. rose substantially.
b. rose slightly.
c. fell slightly.
d. fell substantially.

41. In 1980, the U.S. misery index was

a. much higher than average.
b. slightly higher than average.
c. about average.
d. below average.

42. In the 1970s, the Fed accommodated a(n)

a. adverse supply shock and so contributed to higher inflation.
b. adverse supply shock and so contributed to lower inflation.
c. favorable supply shock and so contributed to higher inflation.
d. favorable supply shock and so contributed to lower inflation.

43. In the 1970’s the Federal Reserve responded to an adverse supply shock. Its policy made
a. the recession that followed smaller and so provided a more favorable tradeoff between
inflation and unemployment.
b. the recession that followed smaller, but in doing so produced a less favorable tradeoff between
inflation and unemployment.
c. the recession that followed larger, but in doing so provided a more favorable tradeoff between
inflation and unemployment.
d. the recession that followed larger and also produced a less favorable tradeoff between inflation
and unemployment.

44. In 1980, the U.S. economy had an inflation rate of

a. about 1 percent and an unemployment rate of about 7 percent.
b. less than 4 percent and an unemployment rate of less than 6 percent.
c. less than 7 percent and an unemployment rate of about 9 percent.
d. more than 9 percent and an unemployment rate of about 7 percent.

45. In 1980, the combination of inflation and unemployment the U.S. was experiencing
a. resulted from a leftward shift of the short-run Phillips curve.
b. was consistent with feasible inflation-unemployment combinations provided by the Phillips
curve of the 1960s.
c. followed two supply shocks that were triggered by the Organization of Petroleum Exporting
Countries.
d. All of the above are correct.

46. An adverse supply shock shifts the short-run Phillips curve to the
a. right. This means the unemployment rate is higher at each inflation rate.
b. right. This means the unemployment rate is lower at each inflation rate.
c. left. This means the unemployment rate is higher at each inflation rate.
d. left. This means the unemployment rate is lower at each inflation rate.

47. There is an adverse supply shock. In response the Federal Reserve pursues an expansionary
monetary policy. Taking into account both the shock and the Federal Reserve’s policy, which of
the following are we sure of?
a. unemployment will be higher
b. unemployment will be lower
c. inflation will be higher
d. inflation will be lower

48. A favorable supply shock

a. raises unemployment and the inflation rate.
b. raises unemployment and reduces the inflation rate.
c. reduces unemployment and raises the inflation rate.
d. reduces unemployment and the inflation rate.

49. If the Federal Reserve accommodates an adverse supply shock,

a. inflation expectations may rise which shifts the short-run Phillips curve shifts right.
b. inflation expectations may rise which shifts the short-run Phillips curve shifts left.
c. inflation expectations may fall which shifts the short-run Phillips curve shifts right.
d. inflation expectations may fall which shifts the short-run Phillips curve shifts left

50. A shock increases the costs of production. Given the effects of this shock, if the central bank
wants to return the unemployment rate towards its previous level it would
a. increase the rate at which the money supply increases. This will also move inflation closer to
its previous rate..
b. increase the rate at which the money supply increases. However, this will make inflation
higher than its previous rate
c. decrease the rate at which the money supply increases. This will also move inflation closer to
its original rate
d. decrease the rate at which the money supply increases. However, this will make higher than its
previous rate.

51. There is a temporary adverse supply shock. Given the effects of this shock, if the central
bank chooses to return unemployment closer to its previous rate it would
a. raise the rate at which it increases the money supply. In the long run this will shift the short-
run Phillips curve right.
b. raise the rate at which it increases the money supply. In the long run this will shift the short-
run Phillips curve left.
c. reduce the rate at which it increases the money supply. In the long run this will shift the short-
run Phillips curve right.
d. reduce the rate at which it increases the money supply. In the long run this will shift the short-
run Phillips curve left.
52. An increase in the price of oil shifts the
a. short-run Phillips curve right and the unemployment rate rises.
b. short-run Phillips curve right and the unemployment rate falls.
c. short-run Phillips curve left and the unemployment rate rises.
d. short-run Phillips curve left and the unemployment rate falls.

53. After an oil price shock, which of the following would move unemployment back towards its
natural rate?
a. the Fed sells bonds
b. the government raises taxes
c. the government increases expenditures
d. All of the above are correct.

54. In which case, if any, will inflation remain higher after a temporary adverse supply shock?
a. both when the central bank maintains a higher money supply growth rate and when the central
bank does nothing
b. only if the central bank does nothing
c. only if the central bank maintains a higher money supply growth rate
d. None of the above is correct. Whether the central bank maintains a higher money supply
growth rate or not, the inflation rate will return to its original level.

55. If there is an increase in the price of oil, then

a. unemployment rises. If the central bank tries to counter this increase, inflation rises.
b. unemployment rises. If the central bank tries to counter this increase, inflation falls.
c. unemployment falls. If the central bank tries to counter this decrease, inflation falls.
d. unemployment falls. If the central bank tries to counter this decrease, inflation rises.

56. A favorable supply shock shifts the short-run Phillips curve

a. right and inflation rises.
b. right and inflation falls.
c. left and inflation rises.
d. left and inflation falls.

57. If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it
should
a. increase the money supply growth rate which raises the inflation rate.
b. increase the money supply growth rate which reduces the inflation rate.
c. decrease the money supply growth rate which raises the inflation rate.
d. decrease the money supply growth rate which reduces the inflation rate.

58. If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it
should
a. increase the money supply growth rate which raises the inflation rate.
b. increase the money supply growth rate which reduces the inflation rate.
c. decrease the money supply growth rate which raises the inflation rate.
d. decrease the money supply growth rate which reduces the inflation rate.
59. If the Fed wants to reverse the effects of a favorable supply shock on the inflation rate, it
should
a. increase the money supply growth rate which also moves unemployment closer to its natural
rate.
b. increase the money supply growth rate, but this moves unemployment further from its natural
rate.
c. decrease the money supply growth rate which also moves unemployment closer to its natural
rate.
d. decrease the money supply growth rate, but this moves unemployment further from its natural
rate.

60. Suppose that a drought significantly reduces agricultural production one year. Which of the
following would likely occur as a result of the bad weather?
a. The short-run aggregate supply curve will shift to the right, and the short-run Phillips Curve
will shift to the right.
b. The short-run aggregate supply curve will shift to the right, and the short-run Phillips Curve
will shift to the left.
c. The short-run aggregate supply curve will shift to the left, and the short-run Phillips Curve will
shift to the right.
d. The short-run aggregate supply curve will shift to the left, and the short-run Phillips Curve
will shift to the left.

61. Suppose that a drought significantly reduces agricultural production one year. In addition,
suppose the Fed accommodates this supply shock by implementing an expansionary monetary
policy. Which of the following would you expect to occur as a result of these changes?
a. The short-run aggregate supply curve will shift to the right, the short-run Phillips Curve will
shift to the left, and the accommodating monetary policy will raise inflation while lowering
unemployment.
b. The short-run aggregate supply curve will shift to the right, the short-run Phillips Curve will
shift to the left, and the accommodating monetary policy will increase unemployment while
lowering inflation.
c. The short-run aggregate supply curve will shift to the left, the short-run Phillips Curve will
shift to the right, and the accommodating monetary policy will raise inflation while lowering
unemployment.
d. The short-run aggregate supply curve will shift to the left, the short-run Phillips Curve will
shift to the right, and the accommodating monetary policy will increase unemployment while
lowering inflation.

62. In response to an adverse supply shock, suppose the Fed implements accommodating
monetary policy. Which of the following occurs as a result of the accommodating monetary
policy?
a. Aggregate demand shifts to the left, which increases inflation and increases unemployment in
the short run.
b. Aggregate demand shifts to the left, which decreases inflation and increases unemployment in
the short run.
c. Aggregate demand shifts to the right, which increases inflation and increases unemployment in
the short run.
d. Aggregate demand shifts to the right, which increases inflation and decreases unemployment
in the short run.

63. Suppose OPEC is unable to come to an agreement regarding oil production and as a result the
price of oil drops. Which of the following would you expect to occur as a result of this favorable
supply shock?
a. The short-run Phillips curve will shift to the right and the unemployment rate will increase.
b. The short-run Phillips curve will shift to the right and the unemployment rate will decrease.
c. The short-run Phillips curve will shift to the left and the unemployment rate will increase.
d. The short-run Phillips curve will shift to the left and the unemployment rate will decrease.