Question 1

29.3 Reducing Inflation
The three figures below show the phases of a disinflation.In part (i) ,the economy is experiencing a sustained inflation at E1. 1.   FIGURE 29-4 -Refer to Figure 29-4,part (iii) .The movement of the economy from E3 to E4 in Phase 3 is often caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada implementing an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising." class="answers-bank-image d-inline" rel="preload" > FIGURE 29-4
-Refer to Figure 29-4,part (iii) .The movement of the economy from E3 to E4 in Phase 3 is often caused by

Accepted Answer

A)  workers accepting a reduction in their wages.
B)  an increase in the productivity of workers.
C)  the Bank of Canada implementing an expansionary monetary policy.
D)  an increase in the unemployment rate.
E)  inflationary expectations that cause wages to continue rising.F) C) and E)
G) A) and C)

Question 2

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

Accepted Answer

A)  an inflationary gap.
B)  a one-time rise in the price level.
C)  rising unemployment until the wage increases cease,or are offset by other wage decreases.
D)  a shrinking output gap.
E)  peace in labour-management relations.F) B) and D)
G) A) and D)

Question 3

The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward.The Bank of Canada validated this negative supply shock with an increase in the money supply,whereas in the United States such monetary validation did not take place.The predictable result was that

Accepted Answer

A)  both countries experienced large increases in price levels and almost no recession.
B)  Canada experienced a large increase in its price level but almost no recession,and the U.S.experienced a smaller increase in its price level but a significant recession.
C)  Canada experienced a one-time price increase and the U.S.experienced persistent inflation.
D)  the U.S.experienced a large increase in its price level but almost no recession,and Canada experienced a smaller increase in its price level but a severe recession.
E)  both countries experienced small increases in price levels and severe recessions.F) A) and D)
G) A) and B)

Question 4

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will

Accepted Answer

A)  increase GDP but have an uncertain effect on the price level.
B)  reduce GDP but have an uncertain effect on the price level.
C)  increase the price level but have an uncertain effect on GDP.
D)  reduce the price level but have an uncertain effect on GDP.
E)  reduce both the price level and GDP.F) B) and E)
G) A) and D)

Question 5

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

Accepted Answer

A)  Because the money transmission mechanism does not apply in a situation of sustained inflation.
B)  Because the rising price level is decreasing the demand for money which is pushing interest rates up.
C)  Because the declining interest rates cause the investment demand curve to shift to the right,which causes interest rates to rise.
D)  Because the rising price level is increasing the demand for money which tends to push interest rates up.
E)  Because the declining interest rates cause the investment demand curve to shift to the left,which causes interest rates to rise.F) A) and E)
G) A) and D)

Question 6

Suppose the actual rate of inflation in the economy is 5%.If we know that expected inflation is 2%,and that output-gap inflation is 1%,then we also know that

Accepted Answer

A)  the NAIRU is 5%.
B)  money wages must be rising by 5%.
C)  non-wage supply-shock inflation must equal 2%.
D)  expected inflation is rising by 2%.
E)  the actual rate of inflation is falling.F) A) and B)
G) C) and D) C

Question 7

One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that

Accepted Answer

A)  inflation fell dramatically and real GDP remained at full employment levels.
B)  inflation fell dramatically,but was accompanied by a major recession.
C)  inflation remained over 10%,but the Bank of Canada avoided a major recession.
D)  inflation remained over 10% and there was a major recession.
E)  unemployment fell,but inflation accelerated due to higher interest rates.F) A) and D)
G) B) and D)

Question 8

Which of the following will lead to sustained inflation?

Accepted Answer

A)  the imposition of a new sales tax
B)  the sudden doubling of a key raw materials price
C)  a new payroll tax that raises firms' unit labour costs
D)  persistent expectations of continued inflation
E)  an early frost that damages the agricultural harvestF) A) and E)
G) C) and D)

Question 9

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

Accepted Answer

A)  if there is no monetary validation.
B)  in the long run.
C)  in the short run.
D)  independent of the economy's adjustment process.
E)  if expected inflation is positive but constant.F) C) and D)
G) A) and D)

Question 10

Canada's actual rate of inflation is fairly constant around the 2% level.We can conclude that

Accepted Answer

A)  real GDP must be below potential GDP because we also have positive unemployment.
B)  real GDP must be above potential GDP.
C)  the Bank of Canada is accommodating this level of inflation with increases in the money supply.
D)  the expectations about inflation are consistently wrong.
E)  the economy is consistently experiencing an inflationary gap.F) B) and E)
G) C) and E)

Question 11

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

Accepted Answer

A)  +12%.
B)  + 6%.
C)  0%.
D)  - 6%.
E)  - 12%.F) B) and C)
G) None of the above D

Question 12

The sacrifice ratio is a measure of the

Accepted Answer

A)  number of people unemployed due to disinflation.
B)  loss of real GDP associated with inflation.
C)  the crowding out of investment due to increases in government purchases.
D)  unemployment associated with a recessionary gap.
E)  cumulative loss in real GDP due to a disinflation.F) A) and D)
G) A) and C) E

Question 13

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

Accepted Answer

A)  an inflationary gap will be created with further inflation.
B)  an inflationary gap will be created,which will cause the AS curve to shift upward again.
C)  the aggregate demand curve will shift up and result in a higher price level.
D)  a recessionary gap will be created,which eventually causes the AS curve to shift downward.
E)  a recessionary gap will be created and will cause a permanent reduction of employment.F) A) and B)
G) A) and C)

Question 14

When a central bank attempts to stop a constant inflation,it tries to remove the inflationary gap by

Accepted Answer

A)  shifting the AS curve upward.
B)  shifting the AS curve downward.
C)  increasing the rightward shift of the AD curve.
D)  stopping the rightward shift of the AD curve.
E)  taking no action and allowing the market to correct itself.F) B) and D)
G) A) and D)

Question 15

The act of "monetary validation" by a central bank can

Accepted Answer

A)  cause a supply shock.
B)  perpetuate inflation.
C)  act to reduce inflation.
D)  increase unemployment.
E)  no longer be carried out by the Bank of Canada.F) A) and C)
G) B) and D)

Question 16

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in

Accepted Answer

A)  no change in the price level.
B)  an ongoing inflation in the economy.
C)  a lower price level and real GDP below potential output.
D)  a higher price level and GDP at potential output.
E)  an ongoing deflation in the economy.F) All of the above
G) B) and C)

Question 17

If a central bank is to successfully end a sustained inflation,it is essential that it

Accepted Answer

A)  avoid any loss in national income.
B)  do so using a "cold-turkey" approach.
C)  change people's expectations of future inflation.
D)  maintain the sacrifice ratio at a constant level.
E)  avoid any increase in unemployment.F) A) and E)
G) C) and E)

Question 18

Suppose we know the following information about a hypothetical economy: - actual unemployment rate = 6%
- NAIRU = 8%
- inflation rate = 4%
If the central bank tries to maintain the current output gap,we can expect the inflation rate to

Accepted Answer

A)  remain constant at 4%.
B)  fall below 4%.
C)  rise above 4%.
D)  cause stagflation.
E)  cause a recession.F) A) and E)
G) B) and D)

Question 19

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

Accepted Answer

A)  there is a recessionary gap.
B)  the NAIRU will re-adjust to 5%.
C)  the AD curve will automatically shift up.
D)  the excess demand for labour will put upward pressure on wages.
E)  the excess supply of labour will put downward pressure on wages.F) B) and E)
G) None of the above

Question 20

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

Accepted Answer

A)  to reduce unemployment below the NAIRU.
B)  that the Bank of Canada must be seen to be pursuing a restrictive monetary policy,in order to stop any expectational inflation.
C)  that wages often fall only very slowly,so the adjustment back to full employment can take a very long time.
D)  that there is the danger of initiating a wage-price spiral.
E)  to keep a "healthy" amount of inflation in the economy.F) B) and E)
G) C) and D)

Exam 29: Inflation and Disinflation

29.3 Reducing Inflation The three figures below show the phases of a disinflation.In part (i) ,the economy is experiencing a sustained inflation at E₁. FIGURE 29-4 -Refer to Figure 29-4,part (iii) .The movement of the economy from E₃ to E₄ in Phase 3 is often caused by

Correct Answer
verified

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

Correct Answer
verified

Correct Answer
verified

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will

Correct Answer
verified

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

Correct Answer
verified

Suppose the actual rate of inflation in the economy is 5%.If we know that expected inflation is 2%,and that output-gap inflation is 1%,then we also know that

Correct Answer
verified
C

One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that

Correct Answer
verified

Which of the following will lead to sustained inflation?

Correct Answer
verified

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

Correct Answer
verified

Canada's actual rate of inflation is fairly constant around the 2% level.We can conclude that

Correct Answer
verified

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

Correct Answer
verified
D

The sacrifice ratio is a measure of the

Correct Answer
verified
E

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

Correct Answer
verified

When a central bank attempts to stop a constant inflation,it tries to remove the inflationary gap by

Correct Answer
verified

The act of "monetary validation" by a central bank can

Correct Answer
verified

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in

Correct Answer
verified

If a central bank is to successfully end a sustained inflation,it is essential that it

Correct Answer
verified

Suppose we know the following information about a hypothetical economy: - actual unemployment rate = 6% - NAIRU = 8% - inflation rate = 4% If the central bank tries to maintain the current output gap,we can expect the inflation rate to

Correct Answer
verified

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

Correct Answer
verified

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

Correct Answer
verified

Exam 29: Inflation and Disinflation

29.3 Reducing Inflation The three figures below show the phases of a disinflation.In part (i) ,the economy is experiencing a sustained inflation at E1. FIGURE 29-4 -Refer to Figure 29-4,part (iii) .The movement of the economy from E3 to E4 in Phase 3 is often caused by

Correct AnswerverifiedShow Answer

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will

Correct AnswerverifiedShow Answer

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

Correct AnswerverifiedShow Answer

Suppose the actual rate of inflation in the economy is 5%.If we know that expected inflation is 2%,and that output-gap inflation is 1%,then we also know that

Correct AnswerverifiedC

One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that

Correct AnswerverifiedShow Answer

Which of the following will lead to sustained inflation?

Correct AnswerverifiedShow Answer

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

Correct AnswerverifiedShow Answer

Canada's actual rate of inflation is fairly constant around the 2% level.We can conclude that

Correct AnswerverifiedShow Answer

Assume your salary is $2000 per month and your employer gives you a raise of 6%.Over the next twelve months the inflation rate is 12%.Your real salary will change by

Correct AnswerverifiedD

The sacrifice ratio is a measure of the

Correct AnswerverifiedE

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

Correct AnswerverifiedShow Answer

When a central bank attempts to stop a constant inflation,it tries to remove the inflationary gap by

Correct AnswerverifiedShow Answer

The act of "monetary validation" by a central bank can

Correct AnswerverifiedShow Answer

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in

Correct AnswerverifiedShow Answer

If a central bank is to successfully end a sustained inflation,it is essential that it

Correct AnswerverifiedShow Answer

Suppose we know the following information about a hypothetical economy: - actual unemployment rate = 6% - NAIRU = 8% - inflation rate = 4% If the central bank tries to maintain the current output gap,we can expect the inflation rate to

Correct AnswerverifiedShow Answer

Suppose the NAIRU for Canada is 6.5%,the actual unemployment rate is 5% and productivity is constant.We can conclude that

Correct AnswerverifiedShow Answer

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

Correct AnswerverifiedShow Answer

29.3 Reducing Inflation The three figures below show the phases of a disinflation.In part (i) ,the economy is experiencing a sustained inflation at E₁. FIGURE 29-4 -Refer to Figure 29-4,part (iii) .The movement of the economy from E₃ to E₄ in Phase 3 is often caused by

Correct Answer
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C

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D

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E

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