CAS EC 102 Lecture Notes - Lecture 25: Monetary Policy, Aggregate Demand, Phillips Curve

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10 Apr 2018

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4/2 l25: the trade-off between inflation and unemployment, the phillips curve, the short-run curve, the long-run curve, shifts in the phillips curve, the role of expectations. Relationship between inflation and unemployment: recessionary gap, yactual < ypotential, price level goes down, unemployment > natural rate. Inflationary gap: yactual > ypotential, price level goes up, unemployment < natural rate. The phillips curve: the phillips curve illustrates a negative association between the inflation rate and the unemployment rate. At point a, inflation is low and unemployment is high. At point b, inflation is high and unemployment is low. Many believed the pc was stable and reliable. Graph 1: phillips curve 1960 - 1969 graph 1: phillips curve 1960 - 2004. If the lras is vertical, it must be the case that, in the long run, the phillips curve is vertical. The long-run phillips curve: according to friedman and phelps, there is no trade-off between inflation and unemployment in the long run.

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40. If the inflation rate falls below the rate that is expected, which of the following will happen?
A) inflationary expectations will increase and the Phillips curve will shift downward in the short run
B) inflationary expectations will decrease and the short-run Phillips curve will shift downward in the long run
C) inflationary expectations will decrease and the short-run Phillips curve will shift upward in the long run
D) inflationary expectations will increase and the Phillips curve will shift upward in the short run
E) inflationary expectations will decrease and the Phillips curve will shift downward in the short run

41. Which case represents the largest increase in the real national debt?
A) the price level increases by 500 percent and nominal debt increases by 500 percent
B) the price level increases by 200 percent and nominal debt increases by 600 percent
C) the price level decreases by 50 percent and nominal debt increases by 300 percent
D) the price level increases by 400 percent and nominal debt increases by 200 percent
E) the price level decreases by 90 percent and nominal debt increases by 200 percent

42. Which of the following is a transfer payment?
A) the federal government's budget deficit
B) unemployment compensation payments
C) military spending
D) wages of government employees
E) the excise tax on gasoline

43. One problem with using countercyclical fiscal policy is that
A) it may take months for the policy to be enacted
B) the policy may take effect too quickly
C) the money supply cannot be changed until several months have passed
D) tax cuts must be matched with spending changes
E) it has no effect on consumption spending

44. Suppose you are the president of a large bank. In which situation would you be most reluctant to loan money to a country?
A) its nominal debt is $10 trillion
B) its nominal debt is 1 percent of nominal GDP
C) its nominal deficit is $150 billion
D) its real deficit is 100 percent of real GDP
E) its real debt is 1 percent of real GDP

45. The national debt
A) can be paid off without major economic effects
B) need never be paid off
C) is no more serious a problem than is a corporation's debt
D) should not exist during a period of economic prosperity
E) is the simple sum of post budget deficits

46. Tax avoidance
A) reduces the difference between the average and marginal tax rates
B) increases federal revenue when it reduces the need for IRS workers
C) reduces federal revenue but does not affect tax progressivity
D) makes the tax system less progressive
E) makes the tax system more progressive

47. The national debt
A) is currently greater than the annual federal deficit
B) is reduced by the revenue generated from the federal deficit
C) decreases as the deficit is reduced
D) is a flow variable
E) varies depending on developments in the stock market

48. In the long run,
A) a larger budget deficit means a larger money supply
B) lower investment spending means slower growth of the standard of living
C) a larger budget deficit means higher consumption spending
D) a larger budget surplus means a smaller capital stock
E) government spending has no effect on the budget deficit or surplus

49. In an expansion,
A) federal budget deficits tend to rise
B) federal budget deficits tend to fall
C) the federal debt tends to rise faster than in a recession
D) federal government tax receipts tend to fall
E) there is pressure on the Fed to monetize the debt

50. Which of the following is not considered an automatic stabilizer?
A) food stamp program for people with low incomes
B) welfare program for families with dependent children
C) Medicaid, a health program for the poor
D) financial assistance for disabled people
E) unemployment programs that pay benefits to those who lose their jobs

whiteprairie-dog658

1) As the unemployment rate rises:

A) the separation rate decreases.

B) the young and unskilled experience lower-than-average increases in unemployment.

C) the young and skilled experience larger-than-average increases in unemployment.

D) the young and unskilled experience larger-than-average increases in unemployment.

E) the proportion of the unemployed finding a job increases.

2) The natural level of employment will increase when which of the following occurs?

A) a decrease in the markup of prices over costs

B) an increase in the natural level of output

C) an increase in the actual unemployment rate

D) an increase in unemployment benefits

E) an increase in the markup of prices over costs

3) Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that:

A) the real wage will decrease by 4%.

B) the real wage will increase by 4%.

C) the nominal wage will increase by less than 4%.

D) the nominal wage will increase by more than 4%.

E) the nominal wage will increase by exactly 4%.

4) An increase in the minimum wage will cause:

A) a reduction in the equilibrium real wage.

B) an increase in the natural rate of unemployment.

C) an increase in the equilibrium real wage.
D) a decrease in the natural rate of unemployment.

E) no change in the natural rate of unemployment.

5) In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on:

A) firms' markup over labor costs.

B) the nominal wage.

C) the interest rate.

D) the expected price level.

E) government spending.

6) The short-run aggregate supply curve (AS) is upward sloping because:

A) an increase in output causes an increase in employment, a reduction in unemployment, an increase in the nominal wage, and an increase in the price level.

B) a reduction in the aggregate price level causes a reduction in nominal money demand and a reduction in the interest rate.

C) a reduction in the aggregate price level (P) will cause a reduction in the interest rate and an increase in output.

D) an increase in the aggregate price level will cause an increase in the interest rate and a reduction in output.

E) an increase in the nominal wage causes a reduction in the amount of output that firms are willing to produce.

7) Assume that the economy is initially operating at the natural level of output. A simultaneous expansionary monetary policy and an increase in oil prices will cause which of the following?

A) an increase in output and a reduction in the interest rate in the short run

B) a reduction in output and an increase in the interest rate in the short run

C) a reduction in output and a reduction in the interest rate in the short run

D) an ambiguous effect in output and an increase in the price level in the short run

E) an ambiguous effect in output and a reduction in the price level in the short run

8) Assume that the economy is initially operating at the natural level of output. A one-time 4% reduction in the nominal money supply will cause:

A) a 4% increase in the price level in the medium run.

B) a 4% reduction in the price level in the medium run.

C) a 4% increase in the real money supply in the medium run.

D) a 4% increase in the interest rate (i) in the medium run.

E) a 4% reduction in investment in the medium run.

9) The original Phillips curve implied that:

A) the markup over labor costs is zero.

B) the expected inflation rate is equal to last year's inflation rate.

C) a lower rate of unemployment causes an increase in the rate of inflation.

D) the inflation is always zero.

E) the expected inflation is always zero.

10) In the Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?

A) a rise in the minimum wage

B) a rise in the expected inflation rate

C) a rise in the employment insurance

D) a drop in the markup

E) a fall in the unemployment rate

2. Using the AS and AD, WS and PS, and IS-LM graphs, illustrate and explain the short run and medium run effects of less stringent enforcement of existing antitrust legislation (Monopolist market power increased) . Explain what happens to P, Y, I, W/P, I and u.

sangriaskunk963

In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of

	100
	110
	120
	90
	105

The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

CAS EC 102 Lecture Notes - Lecture 25: Monetary Policy, Aggregate Demand, Phillips Curve

CAS EC 102 Full Course Notes

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