- Briefly, explain the relationship between cost-push inflation AND increases in labor productivity.
- For each of the following, draw a Phillips Curve (both short run and long run) and show the impact on the Phillips Curve of:
- a decrease in foreign competition that makes workers less concerned that their jobs will move overseas if they demand higher wages.
- an increase in the natural rate of unemployment.
- a rise in inflationary expectations due to a large increase in the world price of oil.
- Explain what NAIRU represents. Explain what happens if the actual unemployment rate does not equal NAIRU. And finally, discuss what factors might cause NAIRU to change.
- State whether EACH of the following descriptions best represents demand-pull inflation OR cost-push inflation/supply-shock inflation.
- Wages increase costs increase prices increase.
- The price of oil goes up costs of production increase prices increase.
- Prices increase costs increase wages increase.
- Total spending in an economy exceeds total output at current prices prices rise.
- The table below lists four events and four possible impacts these events might have on the unemployment rate. For EACH event listed on the left hand side of the table, choose the most likely impact it will have on unemployment.
Event / Impact on unemployment
A decrease in government spending.
A major job-search website crashes and remains offline for 6 months.
A decrease in the minimum wage.
Expansionary monetary policy by the Fed. / Increase in the natural rate of unemployment.
Decrease in the natural rate of unemployment.
Increase in existing cyclical unemployment.
Decrease in existing cyclical unemployment.
- You have the following data on the economy: Ypotential = 5,000 and Y* = 6,000.
- Draw a diagram showing the state of the economy that includes AD, AS (Short run), and AS (Long run).
- Show/explain how the economy should adjust to this situation if nothing explicit is done, i.e., no monetary or fiscal policy is attempted.
- Suppose the automatic adjustment mechanism described above does not work for some reason. List and explain a fiscal and a monetary policy to achieve Ypotential. Use graphs to explain how your policies change the position of the curves. What are the consequences of your policy intervention to achieve full employment?
Multiple Choice
1) The aggregate demand curve slopes downward in part because at higher price levels
a) the purchasing power of consumers’ assets declines and consumption increases.
b) producers can get more for what they produce, and they increase production.
c) the purchasing power of consumers’ assets declines and consumption decreases.
d) the purchasing power of consumers’ assets increases and consumption increases.
2) If the United States were to pass legislation that would make it considerably easier for laborers to emigrate to the United States and work, this would very likely cause
a) the short-run aggregate supply curve to become nearly vertical at all levels of output.
b) the short-run aggregate supply curve to shift to the left.
c) the long-run aggregate supply curve to become flatter.
d) the short-run aggregate supply curve to shift to the right.
3) Which of the following is a CORRECT sequence of events during an expansion?
a) Unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit falls.
b) Unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises.
c) Unemployment rises, income falls, tax revenues rises, unemployment benefits fall, and the budget deficit falls.
d) Unemployment falls, income rises, tax revenue rises, unemployment benefits fall, and the budget deficit falls.
4) If the long-run aggregate supply curve is vertical, then the multiplier effect of a change in net taxes on aggregate output, in the long run,
a) depends on the price level.
b) is one.
c) is zero.
d) is infinitely large.
5) If wages are sticky, an increase in labor
a) demand decreases the wage rate.
b) supply increases the wage rate.
c) demand increases the wage rate.
d) None of the above.
6) After introducing the “price level” to our model of income determination, which of the following statements is correct?
a) The aggregate demand curve shifts to the right when the price level increases.
b) A lower price level leads to a higher interest rate.
c) A higher price level causes the demand for money curve to shift out generating a movement along the aggregate demand curve
d) A lower price level causes the demand for money to shift out generating a movement along the aggregate demand curve
e) The aggregate demand curve shifts to the left when the price level increases.
7) Wages might be “sticky” – fail to adjust instantaneously to changes in the economy – for which of the following reasons?
a) Unions refuse to let wages drop.
b) An implicit understanding exists between firms and workers that firms will not do anything to harm workers relative to other workers in the same industry.
c) Because the economy changes all the time, firms have only imperfect information and may set wage rates too high or too low.
d) Firms may set wages above the equilibrium so that they can keep their most efficient workers who might otherwise be hired away by other firms.
e) All of the above are explanations for why wages might be “sticky”.
8) According to the short-run Phillips Curve, if policy makers want to reduce the unemployment rate, they must accept
a) a lower inflation rate.
b) a higher inflation rate.
c) a reduction in aggregate demand.
d) a reduction in aggregate supply.
9) If the economy of the U.S.consumes more than it produces, then:
a) imports must exceed exports.
b) government spending must exceed government tax revenue.
c) exports must exceed imports.
d) no economy can consume more than it produces.
10) A wife spends five hours a week sending bills to her husband’s customers. She is not paid for her work. She spends the rest of her time as a full-time homemaker. She would be classified as:
a) not in the labor force.
b)employed.
c)unemployed
d) a discouraged worker.
e) none of the above.
11) Monetary policy is most likely to result in inflation when the aggregate supply curve is
a. vertical and the Fed lowers the discount rate.
b. vertical and the Fed raises the reserve requirement.
c. horizontal and the Fed sells securities.
d. horizontal and the Fed lowers the reserve ratio.