Question

13. When the output gap is _______ (an inflationary gap), the unemployment rate is below the natural rate. When the output gap is _______ (a recessionary gap), the unemployment rate is above the natural rate.

A) positive; positive

B) negative; negative

C) positive; negative

D) negative; positive

14. Along a Phillips curve:

A) consumption depends on prices.

B) the inflation rate varies inversely with the unemployment rate.

C) the inflation rate varies directly with the unemployment rate.

D) prices and tax rates are directly related.

15. An increase in the expected rate of inflation would:

A) shift the short-run Phillips curve downward.

B) shift the short-run Phillips curve upward.

C) move the economy along the short-run Phillips curve to higher rates of inflation.

D) move the economy along the short-run Phillips curve to higher rates on unemployment.

16. The long-run Phillips curve is:

A) the same as the short-run Phillips curve.

B) negatively sloped, showing an inverse relationship between unemployment and inflation.

C) vertical at the non accelerating-inflation rate of unemployment (NAIRU).

D) unrelated to the NAIRU.

17. When the economic situation is such that monetary policy can no longer be used because the nominal rate of interest cannot fall below zero, it is called:

A) the liquidity preference.

B) the money neutrality.

C) the liquidity trap.

D) the money illusion.

18. The NAIRU is:

A) the inflation rate at which the unemployment rate does not change over time.

B) a trade-off between unemployment and inflation.

C) the unemployment rate at which inflation does not change over time.

D) a rate at which it is possible to achieve lower unemployment by accepting higher inflation.

19. If the economy is currently in a recessionary gap, real GDP will be________potential output.

A) below

B) the same as

C) above

D) in equilibrium with

20. If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be:

A) a recessionary gap.

B) an inflationary gap.

C) cyclical unemployment.

D) Long-run equilibrium.

Answer 1

13. When there is an inflationary gap the economy is producing beyond the potential output. The output gap is positive and the unemployment rate is below the natural level. During a recessionary gap, the economy is producing below the potential output. The output gap is negative and the unemployment rate is above the natural rate.

Answer: C). Positive, negative.

14. A Phillips curve shows the inverse relationship between inflation and unemployment rate.

Answer: B). Inflation rate varies inversely with the unemployment rate.

15. A rise in expected inflation raises the resource prices. While the resource price increase the shortrun aggregate supply curve shift to the left. As the shortrun aggregate supply shift to the left, the Phillips curve shift upward which shows increased unemployment and higher inflation.

Answer: B) shifts the shortrun Phillips curve upward.

16. There is no tradeoff between inflation and unemployment. The unemployment rate is at non accelerating level of inflation. Hence the longrun Phillips curve is a vertical line.

Answer: C) vertical at the non accelerating inflation rate of unemployment.

17. Liquidity trap refers to a situation where the demand for money is perfectly elastic at a certain low level of rate of interest. So an expansion of money supply cannot reduce the rate of interest further.

Answer: C). the liquidity trap.

18. NAIRU is the rate of unemployment that does cause inflation to increase.

Answer: C). the unemployment rate at which inflation does not change over time.

19. When the economy is experiencing recessionary gap the real GDP is below the potential GDP.

Answer: A). Below.

20. When there is an inflationary gap the shortrun aggregate supply curve intersects with the aggregate demand curve to the right of the longrun aggregate supply curve.

Answer: B). an inflationary gap.