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parkin_8e_TIF_ch28.doc

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Department
Economics
Course
ECON 1010
Professor
Steven Edwards
Semester
Winter

Description
Parkin/Bade, Economics: Canada in the Global Environment, 8e Chapter 28 Canadian Inflation, Unemployment, and Business Cycle 28.1 Inflation Cycles 1) Which of the following would cause the aggregate demand curve to keep shifting rightward year after year? A) a one-time tax cut B) a one-time increase in government expenditures on goods and services C) inflation D) excess wage demands E) a persistent increase in the quantity of money Answer: E Diff: 2 Type: MC Topic: Inflation Cycles Source: Study Guide 2) At full employment an increase in the quantity of money (ceteris paribus) can create a A) demand-pull inflation, as can an increase in government expenditure. B) demand-pull inflation, but an increase in government expenditure cannot. C) cost-push inflation, as can an increase in government expenditure. D) cost-push inflation, but an increase in government expenditure cannot. E) demand-pull and a cost-push inflation, as can an increase in government expenditure. Answer: A Diff: 2 Type: MC Topic: Inflation Cycles 3) Demand-pull inflation occurs when A) aggregate demand increases. B) aggregate supply decreases. C) input costs rise. D) people incorrectly forecast inflation. E) unemployment is above the natural rate. Answer: A Diff: 1 Type: MC Topic: Inflation Cycles Source: Study Guide 4) Inflation resulting from an increase in aggregate demand is called A) cost-push inflation. B) demand-pull inflation. C) anticipated inflation. D) unanticipated inflation. E) political inflation. Answer: B Diff: 1 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 90 Parkin/Bade, Economics: Canada in the Global Environment, 8e 5) Which one of the following can create a demand-pull inflation? A) a sharp increase in the price of oil B) higher wages negotiated by unions C) a cut in the interest rate D) a decrease in investment as a result of a decrease in expected future profits E) a decrease in government expenditure on goods and services Answer: C Diff: 2 Type: MC Topic: Inflation Cycles 6) Stagflation occurs when the economy experiences both A) rising inflation and increasing real GDP. B) falling inflation and decreasing real GDP. C) rising inflation and decreasing real GDP. D) falling inflation and increasing real GDP. E) low exports and low imports. Answer: C Diff: 1 Type: MC Topic: Inflation Cycles 7) Suppose the economy is in long-run equilibrium when the price of oil rises. Which one of the following is not a short-run effect of this situation? A) an increase in real GDP above long-run real GDP B) an increase in the price level C) a decrease in real GDP D) an increase in unemployment E) a decrease in consumer spending Answer: A Diff: 2 Type: MC Topic: Inflation Cycles 8) Suppose OPEC unexpectedly collapses, which leads to a fall in the price of oil. As a result, the price level A) rises, and real GDP increases. B) rises, and real GDP decreases. C) falls, and real GDP increases. D) falls, and real GDP decreases. E) rises, and real GDP remains the same. Answer: C Diff: 1 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 91 Parkin/Bade, Economics: Canada in the Global Environment, 8e 9) An increase in the price level due to an increase in the price of oil A) creates stagflation in the short-run and will trigger a cost-push inflation. B) creates stagflation in the short-run and may trigger off a cost-push inflation. C) increases output above potential GDP. D) leads to an increase in the money wage rate. E) leads to a decrease in the money wage rate. Answer: B Diff: 2 Type: MC Topic: Inflation Cycles Source: Study Guide 10) Cost-push inflation can result from an initial A) decrease in personal income taxes. B) increase in personal income taxes. C) increase in government expenditure. D) increase in the money wage rate. E) increase in transfer payments. Answer: D Diff: 1 Type: MC Topic: Inflation Cycles 11) Stagflation can result from A) a leftward shift of the demand curve. B) a rightward shift of the demand curve. C) a leftward shift of the short-run aggregate supply curve. D) a rightward shift of the short-run aggregate supply curve. E) a rightward shift of the long-run aggregate supply curve. Answer: C Diff: 1 Type: MC Topic: Inflation Cycles 12) A cost-price inflation spiral results if the policy response to stagflation is to keep A) decreasing aggregate demand. B) decreasing short-run aggregate supply. C) increasing aggregate demand. D) increasing short-run aggregate supply. E) doing nothing. Answer: C Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 92 Parkin/Bade, Economics: Canada in the Global Environment, 8e Use the figure below to answer the following question. Figure 28.1.1 13) Refer to Figure 28.1.1. The figure illustrates an economy initially in equilibrium at the intersection of the SA0 curve and the AD 0urve. Which of the following shifts the short-run aggregate supply curve from SAS 0o SAS ?1 A) an increase in the price of oil B) an increase in the price level C) an increase in the marginal product of labour D) an increase in the demand for money E) a decrease in the money wage rate Answer: A Diff: 2 Type: MC Topic: Inflation Cycles Source: Study Guide Copyright © 2013 Pearson Canada Inc. 93 Parkin/Bade, Economics: Canada in the Global Environment, 8e Use the figure below to answer the following questions. Figure 28.1.2 14) Refer to Figure 28.1.2. The economy is in long-run equilibrium. If the short-run aggregate supply curve shifts leftward from SAS 0o SAS ,1ceteris paribus, then people expected A) a 10 percent inflation. B) the price level to rise to 110. C) the real wage rate to fall by 10 percent. D) a real GDP decrease of $50 billion. E) a 15 percent inflation. Answer: E Diff: 2 Type: MC Topic: Inflation Cycles 15) Refer to Figure 28.1.2. The economy is in long-run equilibrium. If the short-run aggregate supply curve shifts leftward from SAS 0o SAS ,1ceteris paribus, then the actual inflation rate A) is greater than the expected inflation rate. B) is less than the expected inflation rate. C) is the same as the expected inflation rate. D) cannot be determined without more information. E) depends on what happens to wage settlements. Answer: B Diff: 3 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 94 Parkin/Bade, Economics: Canada in the Global Environment, 8e 16) Refer to Figure 28.1.2. The vertical distance between SA0 and SAS1represents the A) actual inflation rate. B) expected increase in real GDP. C) actual decrease in real GDP. D) expected inflation rate. E) expected decrease in the real wage rate. Answer: D Diff: 2 Type: MC Topic: Inflation Cycles 17) Refer to Figure 28.1.2. If the short-run aggregate supply curve does not shift, and remains at SAS 0 then the expected inflation rate is A) zero. B) 10 percent. C) 15 percent. D) 5 percent. E) -10 percent. Answer: A Diff: 2 Type: MC Topic: Inflation Cycles 18) Refer to Figure 28.1.2. If SAS shifts from S0S to SA1 , then A) inflation is expected to be 10 percent. B) inflation will be 10 percent. C) a recession will occur. D) unemployment will fall. E) B and C. Answer: E Diff: 2 Type: MC Topic: Inflation Cycles 19) Refer to Figure 28.1.2. Consider the market for labour as the short-run aggregate supply curve shifts leftward from SAS0to SAS 1 This shift could have been the result of an agreement between workers and employers for a A) 10 percent decrease in the money wage rate. B) 10 percent increase in the money wage rate. C) 15 percent decrease in the money wage rate. D) 15 percent increase in the money wage rate. E) 10 percent increase in the real wage rate. Answer: D Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 95 Parkin/Bade, Economics: Canada in the Global Environment, 8e 20) Refer to Figure 28.1.2. Complete the following sentence. The figure illustrates A) cost-push inflation. B) demand-pull inflation. C) a cost-push inflation spiral. D) a one time rise in the price level. E) A and C are both correct. Answer: D Diff: 1 Type: MC Topic: Inflation Cycles 21) A forecast based on all the relevant information is A) an adaptive expectation. B) a future expectation. C) a rational expectation. D) always a correct expectation. E) a perfect forecast. Answer: C Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 96 Parkin/Bade, Economics: Canada in the Global Environment, 8e Use the figure below to answer the following questions. Figure 28.1.3 22) Refer to Figure 28.1.3. Assume that the figure illustrates an economy initially in equilibrium at the intersection of the S0S curve and the A0 curve. If the aggregate demand curve is correctly expected to shift to AD , new equilibrium real GDP is ________ and the new 1 equilibrium price level is ________. A) $380 billion; 125 B) $500 billion; 150 C) $500 billion; 100 D) $620 billion; 125 E) $500 billion; 125 Answer: B Diff: 2 Type: MC Topic: Inflation Cycles Source: Study Guide 23) Refer to Figure 28.1.3. Assume that the figure illustrates an economy initially in equilibrium at the intersection of the S0S curve and the A0 curve. If the aggregate demand curve is expected to shift to A1 but remains at AD 0 the new equilibrium real GDP is ________ and the new equilibrium price level is ________. A) $380 billion; 100 B) $500 billion; 150 C) $500 billion; 100 D) $620 billion; 125 E) $380 billion; 125 Answer: E Diff: 3 Type: MC Topic: Inflation Cycles Source: Study Guide 24) Refer to Figure 28.1.3. Assume that the figure illustrates an economy initially in equilibrium Copyright © 2013 Pearson Canada Inc. 97 Parkin/Bade, Economics: Canada in the Global Environment, 8e at the intersection of the S0S curve and the A0 curve. If the aggregate demand curve is expected to remain at AD but shifts to AD , the new equilibrium real GDP is ________ and the 0 1 new equilibrium price level is ________. A) $380 billion; 125 B) $500 billion; 150 C) $500 billion; 100 D) $620 billion; 125 E) $500 billion; 125 Answer: D Diff: 3 Type: MC Topic: Inflation Cycles Source: Study Guide Use the figure below to answer the following question. Figure 28.1.4 25) Refer to Figure 28.1.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level? A) 100 B) 120 C) 130 D) 150 E) We cannot tell without more information on wage negotiations. Answer: D Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 98 Parkin/Bade, Economics: Canada in the Global Environment, 8e 26) A correctly anticipated increase in the quantity of money, in an economy with an unchanging long-run aggregate supply, will result in A) a rise in the price level and an increase in real GDP. B) a rise in the price level and a decrease in real GDP. C) a proportional rise in the price level and no change in real GDP. D) no change in the price level and an increase in real GDP. E) no change in the price level and no change in real GDP. Answer: C Diff: 3 Type: MC Topic: Inflation Cycles 27) Suppose the quantity of money is expected to remain unchanged but it actually increases. The price level A) rises and real GDP increases. B) rises and real GDP decreases. C) falls and real GDP increases. D) falls and real GDP decreases. E) rises and real GDP stays the same. Answer: A Diff: 2 Type: MC Topic: Inflation Cycles 28) An economy is in long-run equilibrium when aggregate supply unexpectedly decreases. Then real GDP (ceteris paribus) will be A) above potential GDP. B) below potential GDP. C) equal to potential GDP. D) either above, below, or equal to potential GDP depending on the position of the aggregate demand curve. E) either above or equal to potential GDP depending on the position of the aggregate demand curve. Answer: B Diff: 3 Type: MC Topic: Inflation Cycles 29) A correctly anticipated increase in the quantity of money A) increases the price level with no change in real GDP. B) does not change the price level or real GDP. C) does not change the price level but increases real GDP. D) increases the price level and increases real GDP. E) does not change the price level but decreases real GDP. Answer: A Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 99 Parkin/Bade, Economics: Canada in the Global Environment, 8e 30) A forecast that is based on all the relevant information available is A) usually no better than a random guess given that the future bears many uncertainties. B) usually accurate. C) called a rational expectation. D) useful only in the prediction of cost-push inflation. E) useful only in the prediction of demand-pull inflation. Answer: C Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 100 Parkin/Bade, Economics: Canada in the Global Environment, 8e Use the figure below to answer the following question. Figure 28.1.5 31) Refer to Figure 28.1.5. Which one of the graphs in the figure represents an economy experiencing stagflation? A) (a) B) (b) C) (c) D) (d) E) none of the above Answer: A Diff: 2 Type: MC Topic: Inflation Cycles Copyright © 2013 Pearson Canada Inc. 101 Parkin/Bade, Economics: Canada in the Global Environment, 8e 32) Refer to Figure 28.1.5. Which one of the graphs in the figure represents an economy with the price level expected to remain constant? A) (a) B) (b) C) (c) D) (d) E) none of the above Answer: E Diff: 3 Type: MC Topic: Inflation Cycles 33) The economy starts out at a full-employment equilibrium. Some events then occur that generate a demand-pull inflation. All of the following events except an increase in ________ might cause a demand-pull inflation. A) the money wage rate B) exports C) the quantity of money D) government expenditure E) transfer payments Answer: A Type: MC Topic: Inflation Cycles Source: MyEconLab Copyright © 2013 Pearson Canada Inc. 102 Parkin/Bade, Economics: Canada in the Global Environment, 8e Use the figure below to answer the following question. Figure 28.1.6 34) Refer to Figure 28.1.6. Starting at point A, the initial effect of a demand-pull inflation is a move to point ________. As a demand-pull inflation spiral proceeds, it follows the path ________. A) E; I B) C; E, H, I C) C; B, H, G, I D) B; E, G, I E) none of the above Answer: B Type: MC Topic: Inflation Cycles Source: MyEconLab 35) Refer to Figure 28.1.6. Starting at point A, the initial effect of a cost-push inflation is a move to point ________. As a cost-push inflation spiral proceeds, it follows the path ________. A) C; B, H, G, I B) C; E, H, I C) B; E, G, I D) E; I E) C; F Answer: C Type: MC Topic: Inflation Cycles Source: MyEconLab Copyright © 2013 Pearson Canada Inc. 103 Parkin/Bade, Economics: Canada in the Global Environment, 8e 36) The economy starts out at a full-employment equilibrium. Some events then occur that generate a cost-push inflation. Which of the following events might cause a cost-push inflation? A) a decrease in exports B) an increase in the quantity of money C) a decrease in government expenditure D) an increase in the money wage rate or an increase in the money prices of raw materials E) an increase in taxes Answer: D Type: MC Topic: Inflation Cycles Source: MyEconLab 37) Suppose that the money prices of raw materials rise. With no action by the Bank of Canada, I. the aggregate demand curve shifts rightward and the price level rises. II. the aggregate demand curve shifts rightward and the aggregate supply curve shifts leftward. III. the initial outcome is lower employment and a rise in the price level. A) I only B) II only C) III only D) I and II only E) I, II, and III Answer: C Type: MC 38) Stagflation is the result of A) a decrease in aggregate demand. B) a decrease in short-run aggregate supply. C) an increase in aggregate demand. D) an increase in short-run aggregate supply. E) a decrease in short-run aggregate supply combined with a simultaneous increase in aggregate supply. Answer: B Type: MC 39) When the price level is rising and simultaneously real GDP is decreasing A) the natural unemployment rate is rising. B) the natural unemployment rate is falling. C) stagflation is occurring. D) the economy is experiencing an expansionary gap. E) Both A and C are correct. Answer: C Type: MC Copyright © 2013 Pearson Canada Inc. 104 Parkin/Bade, Economics: Canada in the Global Environment, 8e 40) Suppose aggregate demand increases by more than expected. Which of the following describes what occurs? A) Real GDP is greater than potential GDP. B) The price level rises. C) Unemployment falls. D) The natural unemployment rate does not change. E) All of the above. Answer: E Type: MC Copyright © 2013 Pearson Canada Inc. 105 Parkin/Bade, Economics: Canada in the Global Environment, 8e 28.2 Inflation and Unemployment: The Phillips Curve 1) Along the short-run Phillips curve, everything remaining the same, the higher the A) unemployment rate, the lower the inflation rate. B) price level, the lower the inflation rate. C) money wage rate, the lower is the unemployment rate. D) quantity of money, the lower the unemployment rate. E) growth rate of the quantity of money, the higher the inflation rate. Answer: A Diff: 1 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 2) The short-run Phillips curve shows the relationship between ________ holding constant the expected inflation rate and the natural unemployment rate. A) the inflation rate and the economic growth rate B) unemployment and the economic growth rate C) the inflation rate and the unemployment rate D) growth and potential GDP. E) the inflation rate and the growth of the money wage rate. Answer: C Diff: 1 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 3) If the unemployment rate rises and the inflation rate falls, while the natural unemployment rate and the expected inflation rate remain constant, then we are studying a movement along the A) aggregate demand curve. B) long-run aggregate supply curve. C) Friedman curve. D) short-run Phillips curve. E) Phelps-Friedman curve. Answer: D Diff: 2 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 4) For a given expected inflation rate, the higher the unemployment rate, the lower is the actual inflation rate. This relationship is the ________ Phillips curve. When the expected inflation rate changes, this is shown as a movement along the ________ Phillips curve. A) short-run; short-run B) long-run; long-run C) long-run; natural D) natural; short-run E) short-run; long-run Answer: E Diff: 3 Type: MC Topic: Inflation and Unemployment: The Phillips Curve Copyright © 2013 Pearson Canada Inc. 106 Parkin/Bade, Economics: Canada in the Global Environment, 8e 5) If the natural unemployment rate rises A) the long-run Phillips curve shifts rightward and the short-run Phillips curve does not change. B) the long-run Phillips curve shifts leftward and the short-run Phillips curve does not change. C) the short-run Phillips curve shifts rightward and the long-run Phillips curve does not change. D) the short-run and long-run Phillips curves both shift leftward. E) the short-run and long-run Phillips curves both shift rightward. Answer: E Diff: 3 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 6) If the natural unemployment rate falls A) the long-run Phillips curve shifts rightward and the short-run Phillips curve does not change. B) the long-run Phillips curve shifts leftward and the short-run Phillips curve does not change. C) the short-run Phillips curve shifts rightward. D) the short-run and long-run Phillips curves both shift leftward. E) the short-run and long-run Phillips curves both shift rightward. Answer: D Diff: 3 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 7) The short-run Phillips curve shows the relationship between A) the price level and real GDP in the short run. B) the price level and unemployment in the short run. C) unemployment and real GDP in the short run. D) inflation and unemployment, when inflation expectations can change. E) inflation and unemployment, when the expected inflation rate and the natural unemployment rate remain constant. Answer: E Diff: 1 Type: MC Topic: Inflation and Unemployment: The Phillips Curve Source: Study Guide 8) Along the short-run Phillips curve, if the actual unemployment rate falls below the natural unemployment rate, the A) actual inflation rate will be equal to the expected inflation rate. B) actual inflation rate will be greater than the expected inflation rate. C) actual inflation rate will be less than the expected inflation rate. D) actual inflation rate may be greater than, equal to, or less than the expected inflation rate E) expected inflation rate will fall to zero. Answer: B Diff: 3 Type: MC Topic: Inflation and Unemployment: The Phillips Curve Copyright © 2013 Pearson Canada Inc. 107 Parkin/Bade, Economics: Canada in the Global Environment, 8e 9) A movement down along the short-run Phillips curve results from an unanticipated A) decrease in aggregate demand. B) increase in aggregate demand. C) decrease in short-run aggregate supply. D) increase in short-run aggregate supply. E) increase in the natural unemployment rate. Answer: A Diff: 2 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 10) An increase in the expected rate of inflation shifts the A) short-run Phillips curve downward. B) short-run Phillips curve upward. C) long-run Phillips curve rightward. D) long-run Phillips curve leftward. E) B and C are correct. Answer: B Diff: 2 Type: MC Topic: Inflation and Unemployment: The Phillips Curve Use the table below to answer the following questions. Table 28.2.1 Inflation Unemployment (percent per (percent) year) 12 4 11 5 10 6 9 7 8 8 7 9 11) Refer to Table 28.2.1. The table gives points on the short-run Phillips curve for the country of Ruritania. If the expected inflation rate is 10 percent, what is the natural unemployment rate? A) 4 percent B) 5 percent C) 6 percent D) 7 percent E) 9 percent Answer: C Diff: 2 Type: MC Topic: Inflation and Unemployment: The Phillips Curve Copyright © 2013 Pearson Canada Inc. 108 Parkin/Bade, Economics: Canada in the Global Environment, 8e 12) Refer to Table 28.2.1. The table gives points on the short-run Phillips curve for the country of Ruritania. If the expected inflation rate is 10 percent, and the inflation rate unexpectedly rises to 12 percent, what is the unemployment rate? A) 4 percent B) 5 percent C) 6 percent D) 7 percent E) 9 percent Answer: A Diff: 2 Type: MC Topic: Inflation and Unemployment: The Phillips Curve 13) Refer to Table 28.2.1. The table gives points on the short-run Phillips curve for the country of Ruritania. If the expected inflation rate is 10 percent, and the inflation rate unexpectedl
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