CHAPTER 35 MULTIPLE CHOICE 1. The natural rate of unemployment depends upon: a. the rate of growth of the money supply c. the inflation rate b. the interest rate d. none of the above

ANS: D 2. In the long run, the actual inflation rate depends primarily on: a. the expected inflation rate b. the Phillips curve trade-off c. the rate of growth of the quantity of money d. the unemployment rate

ANS: C 3. The Phillips curve implies that the economy faces a: a. long-run trade-off between price inflation and the level of real wages b. short-run trade-off between inflation and unemployment c. short-run trade-off between the actual unemployment rate and the natural rate of unemployment d. long-run trade-off between inflation and unemployment

ANS: B 4. A.W. Phillips developed the Phillips curve concept by looking at the relationship between: a. wage inflation and unemployment c. wage inflation and price inflation b. price inflation and unemployment d. price inflation and output

ANS: A

5. Friedman and Phelps argued: a. that there is never a trade-off between inflation and unemployment b. that there is always a trade-off between inflation and unemployment in the long run c. that the long-run Phillips curve is vertical d. none of the above

ANS: C 6. A vertical long-run Phillips curve: a. is based on the classical theory of invisible hands b. implies that inflation and unemployment are independent of each other in the long
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run c. is consistent with money non-neutrality d. all of the above

ANS: B

7. growth and inflation. a. lower unemployment and lower output c. higher unemployment and lower output b. lower unemployment and higher d. higher unemployment and higher output output

ANS: C 8. If the long-run Phillips curve shifts to the left, the economy will experience a(n) ____ short-run trade-off between inflation and unemployment. a. more favourable c. indeterminate b. less favourable d. constant

ANS: A 9. At points along the long-run Phillips curve: a. the economy is at full employment

c. expected inflation equals actual inflation b. the economy is below full employment d. both A and C

ANS: D 10. The large increase in oil prices in the 1970s was caused primarily by: a. an increase in demand for oil c. an increase in supply of oil b. a decrease in supply of oil d. a decrease in demand for oil

ANS: B 11. According to the theory of rational expectations, an announced policy of reducing the rate of growth of the money supply will result in people: a. reducing their forecasts of expected inflation b. increasing their forecasts of expected inflation c. not changing their forecasts of inflation d. doing none of the above

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ANS: A SHORT ANSWERS
1. Explain how policymakers could use monetary and fiscal policies to move the economy

along the Phillips curve in the direction of higher inflation and lower unemployment. ANS: Increasing the money supply, increasing government spending or cutting taxes would shift the aggregate demand curve to the right, and prices