ALL MULTIPLE CHOICE: 1.When the Federal Reserve increases the money supply, it _
ID: 1208959 • Letter: A
Question
ALL MULTIPLE CHOICE:
1.When the Federal Reserve increases the money supply, it ________ aggregate demand and moves the economy along the Phillips curve to a point with ________ inflation and ________ unemployment.
-expands, higher, higher
-expands, higher, lower
-expands, lower, higher
-contracts, lower, higher
2. If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will ________ and the short-run Phillips curve will shift ________.
-decrease, downward
-decrease, upward
-increase, downward
-increase, upward
3.When an adverse supply shock shifts the short-run aggregate-supply curve to the left, it also
-moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment.
-moves the economy along the short-run Phillips curve to a point with lower inflation and higher unemployment.
-shifts the short-run Phillips curve to the right.
-shifts the short-run Phillips curve to the left.
4.Advocates of the theory of rational expectations believe that
-the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.
-if disinflation catches people by surprise, it will have minimal impact on unemployment.
-wage and price setters never expect the central bank to follow through on its announcements.
-expected inflation depends on the rates of inflation that people have recently observed.
5. From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change?
-The central bank increases the growth rate of the money supply.
-The government cuts spending and raises taxes to reduce the budget deficit.
-Newly discovered oil reserves cause world oil prices to plummet.
-The appointment of a new Fed chairman increases expected inflation.
6.From one year to the next, inflation rises from 4 to 5 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change?
-The central bank increases the growth rate of the money supply.
-The government cuts spending and raises taxes to reduce the budget deficit.
-Newly discovered oil reserves cause world oil prices to plummet.
-The appointment of a new Fed chairman increases expected inflation.
Explanation / Answer
1. Expands Aggregate demand, higher inflation and lower unempoyment.
2. Increase and upward
This is because past inflation influences people's expectations of future inflation. People expect inflation to increase from the past experience of Fed rising the rate of growth of money. If expected inflation goes up, Philips curve shift upward.
3. Shifts Philips curve to right.
4. The sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.
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