CHAPTER 35 - Chapter35 TheShortRunTradeoffbetweenInflation...

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Chapter 35 The Short-Run Tradeoff between Inflation  and Unemployment 1. Most macroeconomists agree that the fundamental issues facing an economy are a. unemployment and inflation, and what should be done about them. b. the economy’s long-run equilibrium position and how to get there. c. the quantity of money and its velocity. d. the long-run Phillips curve and the Laffer curve and whether they generate conflicting outcomes. ANSWER: a unemployment and inflation, and what should be done about them. SECTION: 1 OBJECTIVE: 1 2. One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of  inflation is that a. firms will be put in a position of competing more intensely for scarce resources. b. people will pay higher prices because competition among the suppliers—the firms—intensifies. c. workers will focus more directly on protecting their jobs. d. firms will refuse to shift higher labor costs along to consumers for fear of losing their markets. ANSWER: a firms will be put in a position of competing more intensely for scarce resources. SECTION: 1 OBJECTIVE: 1 3. The short-run Phillips Curve is drawn on the assumption that a. technology does not affect output in the short run. b. the skill level of the workforce does not affect output in the short run. c. prices and wages are sticky in the short run. d. All of the above are correct. ANSWER: c prices and wages are sticky in the short run. SECTION: 1 OBJECTIVE: 1 4. The Phillips curve traces a set of combinations of rates of  a. interest and unemployment. b. real GDP and inflation. c. real GDP and interest. d. unemployment and inflation. ANSWER: d unemployment and inflation. SECTION: 1 OBJECTIVE: 1 207
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208 Chapter 35/The Short-Run Tradeoff between Inflation and Unemployment 5. Suppose that the government in the economy of this diagram regards 9 percent unemployment as  unacceptable. If the government insists on reducing the unemployment rate from 9 percent to 7 percent,  regardless of the consequences, then a. pressure will build in the economy to continuously reduce the rate of inflation. b. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and unemployment. c. the inflation rate will increase but the unemployment rate will stay at 7 percent. d. in the long run the rate of unemployment remains unchanged, but inflation will likely accelerate. ANSWER: d
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This note was uploaded on 10/22/2010 for the course BUSINESS BAIU09 taught by Professor Mr.ken during the Spring '10 term at American InterContinental University Dunwoody.

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CHAPTER 35 - Chapter35 TheShortRunTradeoffbetweenInflation...

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