Question

1. Falling average prices and continued full employment most likely come from

A) a negative demand shock.

B) a negative supply shock.

C) a positive demand shock.

D) a positive supply shock.

E) OPEC

2. Rising average prices and lower unemployment most likely come from

A) higher interest rates.

B) lower income tax rates.

C) increases in the value of the Canadian dollar.

D) improved technologies.

E) investor pessimism.

3. Supply shocks move unemployment and inflation in

A) the same directions, as the Phillips Curve suggests.

B) opposite directions, as the Phillips Curve suggests.

C) the same directions, which is not what the Phillips Curve suggests.

D) opposite directions, which is not what the Phillips Curve suggests.

E) circles.

Answer 1

Answer to the question no. 1:

Option A: A negative demand shock.

Explanation: When the economy is in the full employment the long run supply curve is vertical to the OY axis. In such case if the economyc is operating in the vertical part a negative demand shock will shift the demand curve to the downward, and this will reduce the price level but the employment level and the output will remain unchanged (thus, will be at the full employment).

Answer to the question no. 2:

Option B: Lower income tax rates.

Explanation: A fall in the income tax raises the level of real income of the economy, and this will raise the consumption demand of the economy. Rise in the level of consumption will cause the aggregate demand to go up and will shift it to the upward. This will cause the output and the level of price to increase. Increse in the levelof output means the rise in the employment or fall in the unemployment.

Answer to the question no. 2:

Option C: The same directions, which is not what the Phillips Curve suggests.

Explanation: A negative supply shock causes the price level to increase and the level of output to fall. This is known as the stagflation. This phenomenon causes the inflation and the level of output to move in the same direction. This is oppose the phillips curve which states that the inflation and unemployment moves in a different direction.

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