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Suppose the central bank increases the growth rate of the money supply. In the long run, which of the following is unaffected by this change in policy?


A) the unemployment rate and the inflation rate
B) the unemployment rate but not the inflation rate
C) the inflation rate but not the unemployment rate
D) neither the inflation rate nor the unemployment rate

E) None of the above
F) A) and C)

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Which of the following is correct concerning the long-run Phillips curve?


A) Its position is determined primarily by monetary factors.
B) If it shifts right, long-run aggregate supply shifts right.
C) It cannot be changed by any government policy.
D) Its position depends on the natural rate of unemployment.

E) All of the above
F) B) and C)

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Which of the following played a role in depressing aggregate demand in 2001?


A) the end of a stock-market bubble
B) corporate accounting scandals
C) the terrorist attacks on September 11 of that year
D) All of the above are correct.

E) B) and C)
F) All of the above

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Friedman and Phelps argued that


A) if peoples' inflation expectations were fixed, then an increase in the money supply growth rate could not change output in the short or long run.
B) if peoples' inflation expectations were fixed, then a decrease in the money supply growth rate could raise output and unemployment in the short run.
C) any change in unemployment created by making aggregate demand increase more rapidly is temporary because people eventually revise their inflation expectations.
D) None of the above is correct.

E) A) and D)
F) All of the above

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If a central bank reduced inflation by 2 percentage points and that made output fall by 3 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is


A) 1.
B) 2.
C) 3.
D) None of the above is correct.

E) B) and D)
F) None of the above

Correct Answer

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If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs, then which of the following curves would shift right?


A) the long-run Phillips curve and the long-run aggregate supply curve
B) the long-run Phillips curve but not the long-run aggregate supply curve
C) the long-run aggregate supply curve but not the long-run Phillips curve
D) neither the long-run Phillips curve nor the long-run aggregate supply curve

E) A) and B)
F) B) and D)

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?


A) Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.
B) Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1.
C) Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3.
D) Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.

E) B) and C)
F) A) and D)

Correct Answer

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The long-run response to a decrease in the money supply growth rate is shown by shifting


A) the short-run and long-run Phillips curves left.
B) the short-run and long-run Phillips curves right.
C) only the short-run Phillips curve left.
D) only the short-run Phillips curve right.

E) All of the above
F) A) and B)

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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.

E) All of the above
F) B) and C)

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If the government raises government expenditures, then in the short run prices


A) rise and unemployment falls.
B) fall and unemployment rises.
C) and unemployment rise.
D) and unemployment fall.

E) All of the above
F) None of the above

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Figure 35-8 Use this graph to answer the questions below. Figure 35-8 Use this graph to answer the questions below. -Refer to figure 35-8. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to A) 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. B) 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 3% inflation. C) 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. D) 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation. -Refer to figure 35-8. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to


A) 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 5% inflation.
B) 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.
C) 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 5% inflation.
D) 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

E) All of the above
F) C) and D)

Correct Answer

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According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they


A) decreased the money supply.
B) increased government expenditures.
C) decreased taxes.
D) None of the above is correct.

E) All of the above
F) A) and B)

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In the early 1970s, the short-run Phillips curve shifted


A) rightward as inflation expectations rose.
B) rightward as inflation expectations fell.
C) leftward as inflation expectations rose.
D) leftward as inflation expectations fell.

E) None of the above
F) All of the above

Correct Answer

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?


A) both people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
B) neither people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
C) only the favorable supply shock
D) only people expecting inflation to fall to 7% instead of 5%

E) All of the above
F) B) and C)

Correct Answer

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There is a


A) short-run tradeoff between inflation and unemployment.
B) short-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
C) long-run tradeoff between inflation and unemployment.
D) long-run tradeoff between the actual unemployment rate and the natural rate of unemployment.

E) A) and B)
F) C) and D)

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The theory by which people optimally use all available information when forecasting the future is known as


A) rational expectations.
B) perfect expectations.
C) credible expectations.
D) predictive expectations.

E) C) and D)
F) B) and D)

Correct Answer

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According to the Phillips curve, unemployment and inflation are positively related in


A) the short run and in the long run.
B) the short run, but not in the long run.
C) the long run, but not in the short run.
D) neither the long run nor the short run.

E) B) and D)
F) A) and C)

Correct Answer

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Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If Mokanians lower their inflation expectations, which curve shifts to the left?


A) both the short-run and the long-run Phillips curves
B) neither the short-run nor the long-run Phillips curves
C) only the short-run Phillips curve
D) only the long-run Phillips curve

E) B) and C)
F) A) and C)

Correct Answer

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Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis. Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis. -Refer to Figure 35-4. What is measured along the horizontal axis of the right-hand graph? A) the interest rate B) the price level C) the government's budget deficit as a percent of GDP D) the unemployment rate Figure 35-4. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis. -Refer to Figure 35-4. What is measured along the horizontal axis of the right-hand graph? A) the interest rate B) the price level C) the government's budget deficit as a percent of GDP D) the unemployment rate -Refer to Figure 35-4. What is measured along the horizontal axis of the right-hand graph?


A) the interest rate
B) the price level
C) the government's budget deficit as a percent of GDP
D) the unemployment rate

E) A) and B)
F) A) and C)

Correct Answer

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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.

E) All of the above
F) None of the above

Correct Answer

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