Study Questions 9 (Inflation) MULTIPLE CHOICE.

Choose the one alternative that best completes the statement or answers the question. 1) Which of the following can start an inflation? A) an increase in aggregate demand C) a decrease in aggregate supply B) an increase in aggregate supply D) Both answers A and C are correct. 1)

2) Demand-pull inflation is an inflation that results from an initial ________. A) increase in wage rates B) increase in natural resource prices C) increase in aggregate demand D) decrease in aggregate demand

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3) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C

D) Figure D

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4) In the above figure, suppose that the economy is at point A when the quantity of money increases. In the short run, the economy will move to point ________. A) A, that is, the price level and level of real GDP will not change. B) B C) C D) D 5) In the above figure, suppose that the economy is at point A when foreign countries begin an expansion and buy more U.S.-made goods. In the short run, this change creates a movement to point ________ and an eventual increase in ________. A) D; money wage rates B) D; the natural unemployment rate C) B; the natural unemployment rate D) B; money wage rates 6) If the economy is at potential GDP and the Fed increases the quantity of money, then A) real GDP rises temporarily above potential GDP. B) real GDP rises permanently above potential GDP. C) potential GDP rises. D) potential GDP and real GDP both decrease.

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7) In the above figure, the movement from point A to B to C to D to E represents A) cost-push inflation resulting solely from wage responses to excess labor demand. B) demand-pull inflation resulting solely from wage responses to excess labor demand. C) cost-push inflation resulting from persistent increases in the quantity of money. D) demand-pull inflation resulting from persistent increases in the quantity of money. 8) Cost-push inflation can start with A) an increase in oil prices. C) an increase in government expenditures.

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B) a decrease in the quantity of money. D) a decrease in investment.

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9) Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will I. repeatedly shift the aggregate demand curve rightward and raise the price level. II. shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices. III. result initially in lower employment and a higher price level. A) I only B) III only C) both I and II D) both II and III 10) Stagflation occurs when the A) price level increases and real GDP decreases. B) price level decreases and real GDP increases. C) price level and real GDP decrease at the same time. D) price level and real GDP increase at the same time.

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11) In the above figure, which path represents a cost-push inflation? A) point A to B to D to F to G B) point A to B to D to E to G C) point A to C to D to E to G D) point A to C to D to F to G 12) If people correctly anticipate an increase in aggregate demand, a result is A) an increase in the real value of outstanding government debt. B) workers demanding higher money wages to keep the real wage unchanged. C) there are no predictable results associated with an anticipated increase in aggregate demand. D) a lower rate of inflation in the current time period.

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13) An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD1 , the inflation rate is
________. A) More than 20 percent a year C) 0 percent a year

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B) 10 percent a year D) 20 percent a year 14)

14) An economy is in long-run equilibrium and the price level is 100 in the figure above. Aggregate demand increases and the aggregate demand curve shifts to AD1 . If the increase in aggregate demand is expected, then the inflation rate is ________. A) More than 20 percent a year B) 0 percent a year C) 20 percent a year D) 10 percent a year 15) Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ________. A) real GDP remains at potential GDP B) long-run aggregate supply decreases C) real GDP increases above potential GDP D) real GDP decreases below potential GDP 16) The Phillips curve shows the relationship between the A) nominal interest rate and the real interest rate. B) real interest rate and the unemployment rate. C) unemployment rate and the inflation rate. D) expected rate of inflation and the nominal interest rate. 17) Which of the following is held constant when moving along a short-run Phillip's curve? A) the expected inflation rate B) the growth rate of the quantity of money C) the unemployment rate D) the inflation rate

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18) Suppose the expected inflation rate is 8 percent and the unemployment rate is 3 percent. If the inflation rate rises to 10 percent and the expected inflation rate does not change, A) the short-run Phillips curve will shift upward. B) the natural unemployment rate will rise. C) the short-run Phillips curve will shift downward. D) there will be a movement along the short-run Phillips curve. 19) An increase in the expected inflation rate leads to ________ the short-run Phillips curve. A) a movement downward along B) a movement upward along C) a downward shift of D) an upward shift of 20) Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent. If the expected inflation rate increases to 13 percent, A) the natural unemployment rate will rise. B) the short-run Phillips curve will shift downward. C) the short-run Phillips curve will shift upward. D) there will be a movement along the short-run Phillips curve.

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Inflation rate (percent per year) 8 6 4 2

Unemployment rate (percent) 3 4 5 6

21) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. When the unemployment rate is 4 percent ________. A) and the inflation rate is 6 percent a year, the short-run and long-run Phillips curves intersect B) actual inflation is less than expected inflation C) actual inflation is greater than expected inflation D) and the expected inflation rate is 8 percent a year, the short-run Phillips curve shifts downward 22) An economy's natural unemployment rate is 4 percent. The table above gives some points on the economy's short-run Phillips curve. If the expected inflation rate becomes 8 percent per year, then the ________. A) long-run Phillips curve shifts rightward B) short-run Phillips curve shifts downward C) long-run Phillips curve shifts leftward D) short-run Phillips curve shifts upward

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23) In the above figure, which of the following curves represents the long-run Phillips curve? A) 1 B) 2 C) 4 D) 3

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24) Which of the diagrams in the above figure best illustrates a short-run Phillips curve? A) Figure A B) Figure B C) both Figure A and Figure B D) neither Figure A nor Figure B

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Answer Key Testname: STUDY QUESTIONS 9 (INFLATION AND PHILLIPS CURVE)

1) D 2) C 3) A 4) B 5) D 6) A 7) D 8) A 9) B 10) A 11) B 12) B 13) B 14) C 15) C 16) C 17) A 18) D 19) D 20) C 21) A 22) D 23) A 24) B