King: Economics Chapter 23 Instructions Answer the following questions and then press 'Submit' to get your score. Question 1 Which of the following statements are true?1. For cost increases to lead to sustained inflation, there must be persistent rises in costs followed by persistent government efforts to return output to its potential level.2. For cost increases to lead to sustained inflation, there must be persistent rises in costs coupled with wage flexibility that always returns the labour market to equilibrium.3. For demand increases to lead to sustained inflation, there must be persistent increases in demand followed by persistent government efforts to return output to its potential level.4. For demand increases to lead to sustained inflation, there must be persistent increases in demand coupled with wage flexibility that always returns the labour market to equilibrium. a) 1 and 3 only b) 1 and 4 only c) 2 and 3 only d) 2 and 4 only Question 2 Which of the following statements about the UK is false? a) Phillips's original curve concerned increases in nominal wages, not increases in the price level. b) Phillips's observations suggested that his curve was generally stable between 1861 and 1957. c) Phillips curves are generally concerned with increases in the price level, not increases in nominal wages. d) Phillips curves have generally been fairly stable since 1957. Question 3 Suppose inflation over the next year is expected to be 5%, and assume there are no supply shocks. What rate of inflation will the short-run Phillips curve show at the natural rate of unemployment? a) 0% b) Between 0% and 5% c) 5% d) Over 5% Question 4 Which of the following explains why the long-run Phillips curve is drawn as a vertical line? a) Because in the long run, government policies will ensure that unemployment is at its natural rate. b) Because in the long run, the labour market will settle so that unemployment is at its natural rate. c) Because of the quantity theory of money. d) Because its true shape is unknown. Question 5 Which of the following might shift the short-run Phillips curve to the left? a) A rise in the expected rate of inflation. b) A natural disaster which temporarily disrupts production. c) A rise in the benefits paid to unemployed people. d) An increase in the labour force. Question 6 Which of the following would shift the long-run Phillips curve to the left? a) A change in the expected rate of inflation. b) A natural disaster which temporarily disrupts production. c) Improved technology which increases labour demand. d) A rise in the price of imported inputs. Question 7 Which of the following views is not characteristic of the monetarist approach to policies regarding unemployment and inflation? a) To secure generally stable prices, governments should aim to keep the money stock stable over time. b) Government efforts to reduce unemployment have lags, so when they take effect, it may be too late. c) Government efforts to hold unemployment below the natural rate will lead to accelerating inflation if people form adaptive expectations about the inflation rate. d) If the unemployment rate exceeds the natural rate, wage flexibility will return the rate to the natural rate quite quickly. Question 8 Which of the following statements about rational expectations is false? a) They assume that people take account of all information. b) They assume that, on average, people's forecasts are correct. c) They imply that expected changes in demand have no effects on unemployment or the price level. d) They imply that unexpected changes in demand have long-lasting effects on both unemployment and the price level. Question 9 Suppose the labour market is away from equilibrium, with unemployment above the natural rate. The new Keynesian view of inflation and unemployment offers several reasons why the labour market can stay away from equilibrium for long periods. Which of the following is not one of these reasons? a) Efficiency wages may hold wages below the equilibrium level. b) Workers may resist wage cuts which reduce their wages below those paid to other workers in the same occupation. c) Prices may be sticky downwards in some markets because consumers prefer stable prices. d) Prices may be sticky downwards in some markets because consumers may judge quality by price. Question 10 Suppose a government instructs its central bank to operate a Taylor rule, and that the government sets a credible inflation target. Which of the following statements is false? a) The central bank will make its interest rate decisions solely by considering whether actual inflation goes above or below the target. b) The central bank will decrease the interest rate if there is a demand shock which reduces aggregate demand. c) The central bank will increase the interest rate if there is a supply shock which permanently reduces aggregate supply. d) The central bank may not increase the interest rate if there is a supply shock which temporarily reduces aggregate supply.