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Economics 101 Practice Test: Tradeoff between Inflation and Unemployment
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The trade-off between inflation and unemployment means that policymakers can reduce unemployment below its natural rate in the short run, but this will lead to higher inflation. The economy will eventually return to the natural rate of unemployment once workers have more realistic expectations about the rise in prices.  The Phillips curve is an economic theory that describes the short-term relationship between inflation and unemployment. The curve is named after economist A.W. Phillips, who studied unemployment and wages in the United Kingdom from 1861 to 1957.  The Phillips curve shows... Show more
Economics 101 Practice Test: Tradeoff between Inflation and Unemployment
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25 Questions

1. Consider the following two sentences. Although the Volcker disinflation came at the cost of high unemployment, the cost was less than most economists predicted. The cost of the disinflation might have been even greater if people had believed that Volcker would really reduce inflation as much as he did.
2. An adverse supply shock will cause the short-run Phillips curve to shift
3. A favorable supply shock will cause the short-run Phillips curve to shift
4. Samuelson and Solow reasoned that when aggregate demand was high, unemployment was
5. If the government decided that it wanted lower inflation it would
6. If the sacrifice ratio is 3, reducing the inflation rate from 5 percent to 2 percent would require sacrificing
7. In the late 1970s proponents of rational expectations argued that
8. The experience of the Volcker disinflation of the early 1980s
9. The disinflation of the early 1980s was due to:
10. Refer to the diagrams shown. If the economy starts at c and 1, then in the short run a decrease in the money supply growth rate moves the economy to
11. According to the long-run Phillips curve, if the Fed increases the growth rate of the money supply,
12. In the 1970s, the Fed accommodated
13. Which of the following would shift the long-run Phillips curve right?
14. If the government’s commitment to low inflation is credible, the sacrifice ratio is
15. The Phillips curve shows the relationship between the
16. In order to reduce inflation an economy will typically endure a period of
17. In 1979, Fed Chair Paul Volcker
18. The Phillips curve would be shifted rightward by:
19. The short-run effects of an increase in government expenditures are shown in the graph as
20. According to Friedman and Phelps, the unemployment rate is above the natural rate when actual inflation
21. Faced with an adverse supply shock, policymakers can increase aggregate
22. According to Friedman and Phelps, no matter what the Fed does to the money supply, in the long run, the
23. Refer to the diagrams shown. If the economy starts at c and 1, then in the short run an increase in government expenditures moves the economy to
24. As compared to their initial values, which of the following variables are higher in both the short and long run if the government pursues an expansionary policy?
25. The restrictive monetary policy followed by the Fed in the early 1980s

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