Question

7. To move to a point on the Phillips curve where inflation is lower,
A. unemployment must fall.
B. the Fed could increase the money supply.
C. the government could decrease taxes.
D. All of the above
E. None of the above are correct.

which of the following statements is (are) correct?
(x) During the early 1960s, inflation was about 1 to 3 percent in the United States, compared to about 4 to
6 percent in the late 1960s and early 1970s.
(y) In 1980, the U.S. unemployment rate was about 7 percent and inflation was above 8 percent at the
same time.
(z) In the United States, the inflation rate has been consistently below 4 percent during the period from
2000 to 2015.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

7.

ANSWER IS OPTION E

Ishort run philips curve is drwan above. In short run Philip curve shows an inverse relation between Inflation and unemployment. There fore when inflation increases unemployment decreases and vice versa. At point A ( upper part of philips curve) inflation is high and unemployment is low. At point B (Lower part of philips curve) inflation is low and unemployment is high.

Option A Unemployment must fall.

explanation: when unemployment is low inflation would be higher. This is a wrong statement.

Option B The FED could increase the money supply.

explanation: When money supply increases,Inflation increases ( price level increases as per quantity theory of money) and unemployment decreases. Hence this Option is wrong.

Option C: The government could decrease taxes.

when government cuts taxes, people get hold of more disposable income than before and consumption increases. Increase in consumption increases aggregate demand and there by inflation increases ( demand pull ). Thus a fall in government taxes causes inflation. Thus option C is also not a correct option.

ANSWER IS OPTION E

6.

Answer : B (X and Y only)

Statement X:

During the early 1960s, inflation was about 1 to 3 percent in the United states, compared to about 4 to 6 percent in the late 1960s and early 1970s.

Refer picture above for the Proving the statement above.

From the picture we can understand the fact that Inflation of early 1960s was between 1 to 3 percent. Low inflation was the result of better monetary policies and brettonwood aggrement ( which favoured United states). Later, US dollar as reserve currency face a supply shock as United states felt it is difficult to keep dollar - gold convertability. demand for dollar wa higher than the US GOLD stock. in the mean while inflation surges up. During late1970s Oil price shock also contributed to inflation.

The Option X is correct.

Y. In 1980, the U.S unemployment rate was about 7 percent and inflation was above 8% at the same time.

During this period there occured a supply shock triggered by Organisation of petroleum exporting countries. The price od oil has increases. Oil being the prime input of major sectors of economy, cost of production increasesAggregate supply curve shift leftward, causing high price and low output ( low employment). Therefor during this period, price and unemploment was high.

Option Y is also true.

Option z.

In the Unites States, the inflation rates has been consistently below 4 % during the period 2000 to 2015.

From the above figure we can understand that inflation in United state were below 4 percent from 2000 to 2015, except the year 2007. In 2007 inflation is 4.08%. Thus the option Z is incorrect.