Chapter 11 Mishkin (11)

8/10/2019 Chapter 11 Mishkin (11)

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Macreconomics: Policy and Practice(Mishkin)

Chapter 11 Aggregate Supply and the Phillips Curve

11.1 The Phillips Curve

1) The idea behind the Phillips curve is that ________.A) tight labor markets lead to inflationary pressures

B) hen the unemployment rate is lo! ages ill increase

C) hen firms raise ages to attract ne orkers! prices ill also increase") all of the above

#) none of the above

Anser$ "

Topic$ 11.1 The Phillips CurveAAC%B$ &eflective Thinking

') The idea behind the Phillips curve is that ________.

A) tightness in the labor market raises ages but has little impact on pricesB) hen the unemployment rate is lo! ages ill decrease

C) hen firms raise ages to attract ne orkers! prices ill also increase") all of the above


Anser$ CTopic$ 11.1 The Phillips Curve

AAC%B$ &eflective Thinking

() The idea behind the Phillips curve is that ________.A) hen the unemployment rate is lo ages ill decrease

B) tightness in the labor market puts upard pressures on ages and pricesC) hen firms raise ages to attract ne orkers! prices decrease") all of the above


Anser$ BTopic$ 11.1 The Phillips Curve


) The idea behind the Phillips curve is that ________.A) tightness in the labor market puts donard pressures on ages and prices

B) hen the unemployment rate is lo ages ill increase

C) hen firms raise ages to attract ne orkers! prices decrease") all of the above




1

Copyright * '+1' Pearson #ducation! ,nc.


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-) ________ is are) the endogenous variables) in the Phillips curve.

A) #/pected inflation

B) ,nflationC) The natural rate of unemployment

") all of the above

#) none of the aboveAnser$ B

Topic$ 11.1 The Phillips Curve

0) ,n the 10+s! the Phillips curve as ________.

A) a very popular e/planation for inflation fluctuations

B) consistent ith a clear negative relationship beteen inflation and unemployment

C) suggestive of a permanent trade off beteen inflation and unemployment") all of the above


Anser$ "


2) ,n the 10+s! the Phillips curve as ________.

A) consistent ith a positive relationship beteen inflation and unemployment

B) suggestive of a temporary trade off beteen inflation and unemploymentC) a very popular e/planation for inflation fluctuations

") all of the above




3) ,n the 10+s! advocates of the Phillips curve suggested ________ .

A) an 4optimal4 goal of 15 unemployment and 15 to '5 inflation rates could be achieved

B) a 4realistic4 goal of 25 unemployment and 05 to 25 inflation rates could be achievedC) a 4nonperfectionist4 goal of (5 unemployment and 5 to -5 inflation rates could be

achieved

") all of the above

#) none of the aboveAnser$ C



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) The Phillips curve as ________.

A) never very popular in policy circles

B) influential in efforts to bring the unemployment rate don to lo levelsC) generally confirmed in the 12+s! hen lo unemployment persisted despite rising inflation

") all of the above




1+) The Phillips curve as ________.

A) adopted by economic policy teams in the 6ennedy and 7ohnson administrationsB) influential in efforts to bring the unemployment rate don to lo levels

C) discredited in the 12+s! hen both inflation and unemployment ere relatively high

") all of the above#) none of the above

Anser$ "


11) 8ilton 9riedman and #dmund Phelps contributed hich insights) to Phillips curve analysis:

A) that firms and orkers care about nominal! not real agesB) that ages have a one;to;one relationship ith inflation

C) that! in the long run! the level of unemployment is independent of inflation


Anser$ C


1') 8ilton 9riedman and #dmund Phelps contributed hich insights) to Phillips curve analysis:A) that a 4realistic4 goal of 25 unemployment and 05 to 25 inflation rates could be achieved

B) that! in the long run! sticky ages and staggered prices prevent unemployment from

remaining lo

C) that firms and orkers care about real ages") all of the above




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1() 8ilton 9riedman and #dmund Phelps contributed hich insights) to Phillips curve analysis:

A) that firms and orkers care about nominal! not real ages

B) that age changes have a one;to;one relationship ith changes in e/pected inflationC) that! in the long run! prices are fle/ible! so unemployment cannot remain above


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12) =hat can be concluded from 8ilton 9riedman and #dmund Phelps> e/pectations;augmented

Phillips curve:

A) that there is a long run tradeoff beteen unemployment and inflationB) that there is a short run tradeoff beteen unemployment and inflation

C) that inflation is positively related to the unemployment gap


Anser$ B


13) ,n 8ilton 9riedman and #dmund Phelps> e/pectations;augmented Phillips curve! ________.

A) unemployment ill! in the long run! reach the natural rateB) in the long run! e/pected inflation ill reach the ?A,&@

C) inflation is positively related to the unemployment gap

") all of the above

#) none of the aboveAnser$ A


1) The ong;&un Phillips Curve is vertical! suggesting that ________.A) alloing inflation to rise ill not succeed in keeping unemployment lo

B) changes in unemployment have no lasting impact on inflation

C) shifts of the short;run Phillips curve impact inflation! but have no effect on unemployment


Anser$ A


'+) bservations of inflation in the 12+s prompted hat further addition to the Phillips curve:

A) price shocks

B) e/pected inflation

C) personal consumption e/penditures") all of the above


Anser$ ATopic$ 11.1 The Phillips Curve


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'1) =hich of the folloing might cause an upard shift of the modern Phillips curve:

A) an increase in oil prices

B) an increase in the price of importsC) age agreements that include compensation for inflation

") all of the above

#) none of the aboveAnser$ "



'') ________ ill cause a movement along the modern Phillips curve.

A) An increase in oil prices

B) An increase in the price of importsC) =age agreements that include compensation for inflation

") all of the above


Anser$ #Topic$ 11.1 The Phillips Curve


'() n the modern Phillips curve! the initial impact of an increase in the orld price of steel is

shon by ________.A) an upwardmovement along the Phillips curve to a higher inflation rate

B) an upwardshift of the Phillips curve leading to higher inflation rates for any unemployment

rate

C) a downwardshift of the Phillips curve leading to lowerinflation rates for any unemploymentrate

") a downwardmovement along the Phillips curve to higherunemployment rates




') n the modern Phillips curve! the initial impact of government policies to stimulate the

economy is shon by ________.A) an upwardmovement along the Phillips curve to a higher inflation rate


rateC) a downwardshift of the Phillips curve leading to lowerinflation rates for any unemployment

rate

") a downwardmovement along the Phillips curve to higherunemployment rates#) none of the above

Anser$ A



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'-) n the modern Phillips curve! the initial impact of productivity improvements that loer the

costs of production is shon by ________.

A) an upwardmovement along the Phillips curve to a higher inflation rateB) an upwardshift of the Phillips curve leading to higher inflation rates for any unemployment

rate

C) a downwardshift of the Phillips curve leading to lowerinflation rates for any unemploymentrate

") a downwardmovement along the Phillips curve to higherunemployment rates




'0) n the modern Phillips curve! the beginning of a recession is shon by ________.

A) an upwardmovement along the Phillips curve to a higher inflation rate


rateC) a downwardshift of the Phillips curve leading to lowerinflation rates for any unemployment

rate") a downwardmovement along the Phillips curve to higherunemployment rates


Anser$ "Topic$ 11.1 The Phillips Curve


'2) As ages and prices become more fle/ible ________.A) ages becomes less responsive to unemployment deviations from the natural rate

B) it becomes easier to differentiate the short;run from the long;run Phillips curve

C) inflation becomes more responsive to unemployment deviations from the natural rate") all of the above




'3) ,f ages and prices become e/tremely fle/ible ________.

A) there is no trade off beteen inflation and unemployment

B) unemployment can hardly deviate from the natural rateC) it becomes very difficult to differentiate the short;run from the long;run Phillips curve

") all of the above




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') As ages and prices become more sticky ________.

A) inflation becomes more responsive to unemployment deviations from the natural rate

B) ages become less responsive to unemployment deviations from the natural rateC) it becomes more difficult to differentiate the short;run from the long;run Phillips curve

") all of the above




(+) As ages and prices become more sticky ________.

A) the short;run Phillips curve gets flatter

B) ages become less responsive to unemployment deviations from the natural rateC) it becomes easier to differentiate the short;run from the long;run Phillips curve

") all of the above


Anser$ "Topic$ 11.1 The Phillips Curve


(1) ,f e/pectations about inflation are adaptive! they are ________.

A) formed by looking at the futureB) likely to change rapidly

C) based on past inflation

") all of the above




(') ,f e/pectations about inflation are adaptive! they are ________.

A) not based on all available! relevant informationB) backard;looking

C) likely to change sloly

") all of the above




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(() ,f e/pectations about inflation are adaptive! they are ________.

A) uick to respond to price shocks

B) consistent ith the notion of sticky pricesC) based on changes in productivity

") all of the above




() According to the accelerationist Phillips curve! ________.

A) e/pectations adDust continually to the latest information

B) increases in inflation cause the unemployment gap to idenC) inflation ill change so long as an unemployment gap persists

") all of the above




(-) An e/ample of aprice shockis ________.

A) an increase in ages as a result of higher e/pected inflationB) the arrival of immigrants seeking employment

C) the decline in autonomous spending that results from rising unemployment

") all of the above

#) none of the aboveAnser$ #



(0) Eiven the accelerationist Phillips curve F G ; +.( @ ; 0) H I! suppose that inflation in the

preceding period as ( percent! unemployment is 0 percent! and there is a price shock of '

percent. The current inflation rate is ________.A) ( percent

B) +.' percent

C) - percent") 1 percent


Anser$ C

Topic$ 11.1 The Phillips CurveAAC%B$ Analytical %kills



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(2) Eiven the accelerationist Phillips curve F G ; +.( @ ; 0) H I! suppose that inflation in the

preceding period as ( percent! unemployment is 2 percent! and there is no price shock. The

current inflation rate is ________.A) '.2 percent

B) ( percent

C) +. percent") (.( percent#) none of the above

Anser$ A


(3) Eiven the accelerationist Phillips curve F G ; +.2 @ ; -) H I! suppose that inflation has

increased from 3 percent to 1+ percent. ,f the unemployment rate is percent! then the price

shock is ________.A) '.2 percent

B) +.0 percentC) 1.( percent") 1 percent



AAC%B$ Analytical %kills

() Based on the data in this table!

U

period 1 0 1 period ' 3 + '.'

period ( 3 ' '.

if the inflation rate in period


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+) Based on the data in this table!

U

period 1 0 1

period ' 3 + (.'

period ( 3 ' .

,f the natural rate of unemployment is steady at 2 percent! and! in period four! there is no price

shock and unemployment is 3 percent! then the inflation rate in period ill be ________

percent.A) .

B) (.0

C) (.") 1.0


Anser$ B


1) Based on the data in this table!

U

period 1 0 1

period ' 2 + .-

period ( 0 ' ::

,f the natural rate of unemployment is steady at 3 percent! hat is the inflation rate in period (:

A) 3.- percentB) 2.- percent

C) -.- percent") 0.( percent




') =hy is there no long;run trade;off beteen unemployment and inflation:

Anser$ Because hen the labor market is so tight as to cause ages and prices to rise! the

resulting inflation intensifies the pressure on ages and prices by reducing the real age andincreasing e/pected inflation). %ince the inflation in no ay 4balances4 or 4compensates4 for thelo level of unemployment! the condition of 4too lo4 unemployment is unsustainable in the

long run.


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() =hat are price shocks: =hy ere they not included in the original formulation of the

Phillips curve: =hy ere they added to the modern Phillips curve:

Anser$ ,n the Phillips curve! inflation is determined by e/pected inflation and theunemployment gap. A price shock is anything other than those to factors that has an impact on

inflation! such as a change in import prices. At first! Phillips and other economists ere

interested in the relationship beteen unemployment and inflation! rather than in devising acomprehensive e/planation addressing all causes of inflation. nce it became clear that a

persistent unemployment gap ill cause inflation to change repeatedly shifts of the short;run

Phillips curve)! it as possible to ask ho much of inflation is attributable to labor marketconditions! hich reuires recognition of all other factors that influence inflation.



) Jo do you suppose most people form an e/pectation of future inflation: ,s that method

consistent ith the assumption of adaptive e/pectations:

Anser$ ike any mechanic in the Bron/! most people distil a 4gut opinion4 from their personal

e/perience and hat they read in the papers! hear from others! etc. =hile 4e/pert4 analysis ofproDected trends has some influence! greater eight is placed! probably! on hether inflation has

seemed recently high! or rising! or declining! or lo! and e/pected inflation is an e/trapolationfrom those observations. Adaptive e/pectations e/aggerates to an e/clusive reliance on the past!

but seems a reasonable appro/imation of the actual method.


-) A. =. Phillips> 1-3 paper e/amined unemployment and age groth. =hat role! if any!

does age groth play in the modern Phillips curve:Anser$ The modern Phillips curve relates unemployment to inflation! rather than ages. This

allos inclusion of e/pected inflation and price shocks as causes of inflation! in addition to the

unemployment gap. But the central idea remains that changes in inflation are driven by agechanges. =hen ages are sticky! then unemployment gaps have a small impact on inflation!

hile fle/ible ages cause large changes in inflation.


0) %uppose the government loers unemployment by hiring more government orkers. Jo

does it matter hether ages and prices are sticky:Anser$ As long as ages and prices are sticky! then the decrease in the unemployment rate ill

not cause a substantial increase in ages. Joever! if orkers throughout the economy perceive

an opportunity to seek an increase in their real age! employers may need to comply in order toretain and attract ualified orkers. ,f nominal ages increase! producers ill need to raise

prices. The resulting inflation ill cause e/pected inflation to rise! sparking further increases in

the nominal age.Topic$ 11.1 The Phillips Curve


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11.' The Aggregate %upply Curve

1) ,n the long run ________.A) the amount of output an economy can produce is determined by real variables like capital!

labor and technological advances

B) aggregate supply is fi/ed at the potential level of outputC) there is enough time for prices to fully adDust so the classical dichotomy holds

") all of the above


Topic$ 11.' The A% curve


') ,n the long run ________.

A) the aggregate supply is vertical ith respect to output

B) the Phillips curve is vertical ith respect to unemployment

C) fluctuations in the inflation rate have no impact on output and unemployment") all of the above




() ,n the long run ________.

A) the aggregate supply is vertical ith respect to unemployment

B) the Phillips curve is vertical at a given level of e/pected inflationC) the economy reaches the potential output level consistent ith the natural rate of

unemployment


Anser$ C

Topic$ 11.' The A% curveAAC%B$ &eflective Thinking

) The natural rate of output is ________.

A) independent of the inflation rateB) alays loer than potential output

C) unrelated to the natural rate of unemployment


Anser$ A


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-) =hen ages and prices are completely fle/ible ________.

A) inflation is determined by e/pected inflation and price shocks

B) labor hoarding occursC) unemployment is disconnected from the real economy

") all of the above

#) none of the aboveAnser$ A



0) =hich of the folloing shos a negative relationship beteen the output and unemployment

gaps:A) the A% curve

B) the Phillips curve

C) kun>s la") the classical dichotomy


Anser$ CTopic$ 11.' The A% curve


2) =hich of the folloing never assumes! either implicitly or e/plicitly! independence beteennominal and real variables:

A) the A% curve

B) the Phillips curveC) kun>s la

") the classical dichotomy




3) =hich of the folloing best appro/imates kun>s la:

A) a 1 percent increase in output leads to a ' percent decrease in unemployment

B) a 1 percent increase in output leads to a 1 percent decrease in unemploymentC) a ' percent increase in output leads to a percent increase in unemployment

") a ' percent increase in output leads to a 1 percent decrease in unemployment




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) According to kun>s la! an increase in hich of the folloing is associated ith an increase

in unemployment:

A) inflationB) output

C) e/pected inflation

") autonomous e/penditure#) potential output

Anser$ #


1+) =hich of the folloing is true in regards to kun>s la:

A) employment does not increase commensurately ith output rises because firms tend to hoardlabor

B) hen demand increases! firms tend to ork their employees harder and longer

C) it is kun>s prediction of the negative relationship beteen the output and unemploymentgaps that allos the modern Phillips curve to be translated into the A% curve

") all of the above




11) The short;run aggregate supply curve shos that inflation ill change as a result of changes

in ________.

A) outputB) potential output


") price shocks#) all of the above

Anser$ #


1') The short;run aggregate supply curve shos that a change in inflation ill cause a)

changes) in ________.

A) outputB) potential output


") price shocks#) all of the above

Anser$ C


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1() According to the short;run aggregate supply curve! if output minus potential output euals


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12) ,f the output gap is constant at minus ' and the inflation rate has fallen from 0 percent to -

percent! then ne/t period>s short;run aggregate supply curve might be ________.

A) F G - ; +.- 1( ; 1-)B) F G - H +.- 1( ; 1-)

C) F G H +.- 1( ; 1-)

") F G - H ' 11 ; 1-)#) none of the above

Anser$ B

Topic$ 11.' The A% curveAAC%B$ Analytical %kills

13) =hen a price shock occurs! the inflation rate is affected ________.A) only in the period of the price shock

B) only in the period after the price shock

C) only if the price shock causes a change in output") only if the price shock persists for more than one period


Anser$ #Topic$ 11.' The A% curve


1) =hen a price shock has occurred! inflation returns to its pre;shock rate ________.A) in the period folloing the price shock

B) in the period hen output has returned to its pre;shock rate

C) once the output gap has returned to


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'1) ,f kun>s la is @ ; @nG ; +.- L ; LP)! and potential output gros at '5 per year! then a

recession that causes output to decrease by one percentage point ill cause unemployment to

increase by ________.

A) 1 percentage pointB) 1.- percentage points

C) ' percentage points") ( percentage points#) one;half percentage point

Anser$ B



'') ,f kun>s la is @ ; @nG ; +.0 L ; LP)! and the Phillips curve is F G Fe; '.- @ ; @n) H I!

then the short;run aggregate supply curve is ________.

A) F G Fe; 1.- L ; LP) H I

B) F G FeH .' L ; LP) H I

C) F G Fe; '.- L ; LP) H I

") F G Fe; '.- L H LP) H I


Anser$ A


'() ,f the short;run aggregate supply curve is F G Fe; 1.' L ; LP) H I! output euals potential

output and there is a price shock of minus to! then the inflation rate is ________.A) '

B) Fe; 'C) minus '

") minus '.#) none of the above

Anser$ B


') Technological advances lead to ________.A) a shift of the short run A% curve up

B) a shift of the long run A% curve to the left

C) an upard movement along the long run A% curve") all of the above


Anser$ #

Topic$ 11.' The A% curveAAC%B$ &eflective Thinking

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'-) ,f the natural rate of unemployment declines ________.

A) labor is more heavily utili


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') ,n the short run! if current output remains persistently above potential ________.

A) inflation ill rise causing a movement along the aggregate supply curve

B) e/pected inflation ill rise causing an upard shift of the aggregate supply curveC) the aggregate supply curve ill shift until current output returns to its potential level

") all of the above




Aggregate Supply Curves (1)

(+) Based on the graph above! if the economy is at point '! then assuming no price shocks and

no changes in actual and potential output) the inflation rate ne/t period ill be ________

percent.A) -

B) (.-

C) .-

") #) none of the above

Anser$ A


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(1) Based on the graph above! a cause of movement from point 1 to point ' might be ________.

A) a positive price shock

B) government policy that loers unemploymentC) an increase in potential output

") an increase in e/pected inflation




(') Based on the graph above! suppose the economy is at point '! then output falls to 1+ and

there is a price shock of one percent. The inflation rate ne/t period ill be ________ percent.

A) -B) (.-

C) .-

")



(() Based on the graph above! the short;run aggregate supply curve is ________.A) F G ' H 1.- L ; 1+) H I

B) L G 3(

'H

(

'F) H I

C) F G ' H L ; 11) H I

") F G (.- H ' L ; 1+) H I


Anser$ ATopic$ 11.' The A% curve


() ,f the short;run aggregate supply curve is shifting don repeatedly! it is rather likely that

________.

A) output is declining repeatedly! relative to potential outputB) the long;run aggregate supply curve is shifting to the left

C) negative price shocks are recurring

") all of the above

#) none of the aboveAnser$ #



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(-) =hat factors cause a shift in the long;run aggregate supply curve: 8ight any of these cause

the short;run aggregate supply curve to shift! also:

Anser$ The factors that shift the long;run aggregate supply curve are 1) the si


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(3) =hy are changes in the output gap larger than changes in the unemployment gap: =hy is the

relationship e/pressed in kun>s la not affected by inflation or e/pected inflation:

Anser$ Common sense suggests that output and unemployment must be negatively;related.Joever! the link beteen the to is employment. %ince the productivity of employed orkers

can vary! output has e/tra fle/ibility. 8oreover! even hen employment is changing along ith

output! not all of the employment change corresponds to a change in unemployment! since neemployees might be ne entrants to the labor force! and employees ho leave their Dobs might

leave the labor force and not be counted among the unemployed. All these connections beteen

output! employment! the labor force! and unemployment are realK they do not involve any priceadDustments.



() @nprecedented stimulative policies throughout the global economy have sparked debate over

the inflationary implications. "efenders of the policies argue that! even if the policies raise

inflationary e/pectations! actual inflation ill remain lo. Critics charge that current policies are

nearly certain to result in e/cessive inflation. =hat does the aggregate supply curve have to say:Anser$ As long as the negative output gap persists! rising e/pectations of inflation ill not

translate into much actual inflation. Joever! if the output gap shrinks in absolute value aspolicy makers intend! nothing ill insulate inflation from e/pectations. To avoid the critics>

prediction of e/cessive inflation! policy makers must someho manage e/pectations and avoid

alloing a positive output gap from emerging).Topic$ 11.' The A% curve


11.( %hifts in Aggregate %upply Curves

1) There are no uestions for this section.

Anser$

'

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Chapter 11 Mishkin (11)

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