Boğaziçi University, Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS FINAL , Saturday 10:00 TYPE A

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1 NAME: NO: SECTION: Boğaziçi University, Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS FINAL , Saturday 10:00 TYPE A Turn off your cell phone and put it away. During the exam if you are seen with a cell phone, on or off, your exam will be taken away instantaneously. Put away all your lecture notes, books, etc. Write your full name, student number and section on the top. Please put all your answers in your answer key. Do not forget to put your EXAM TYPE on your answer key. There are 80 multiple choice questions and 12 pages in the exam. Make sure you have them all. You have 120 minutes. GOOD LUCK!! 1. Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires Figure 1. (a) decreases, and the supply of tires increases. (b) is unaffected, and the supply of tires decreases. (c) is unaffected, and the supply of tires increases. (d) None of the above is necessarily correct. 2. What would happen to the equilibrium price and quantity of lattes if the cost to produce steamed milk, which is used to make lattes, increased, and scientists discovered that lattes cause heart attacks? (a) Both the equilibrium price and quantity would increase. (b) Both the equilibrium price and quantity would decrease. (c) The equilibrium price would decrease, and the effect on equilibrium quantity would be ambiguous. (d) The equilibrium quantity would decrease, and the effect on equilibrium price would be ambiguous. 3. Refer to Figure 1 above. Suppose a price ceiling of $5 is imposed on this market. As a result, (a) the quantity of the good supplied decreases by 20 units. (b) the demand curve shifts to the left; quantity sold is now 30 units and the price is $5. (c) buyers total expenditure on the good decreases by $80. (d) the price of the good continues to serve as the rationing mechanism. 1

2 4. Refer to Figure 1. Suppose a price floor of $8 is imposed on this market. As a result, (a) buyers total expenditure on the good decreases by $20. (b) the supply curve shifts to the left; quantity sold is now 30 units and the price is $8. (c) the quantity of the good demanded decreases by 10 units. (d) the price of the good continues to serve as the rationing mechanism. 5. In 2014, a farmer grows and sells $3 million worth of corn to Big Flakes Cereal Company. Big Flakes Cereal Company produces $8 million worth of cereal in 2014, with sales to households during the year of $7 million. The unsold $1 million worth of cereal remains in Big Flake Cereal Companys inventory at the end of The transactions just described contribute how much to GDP for 2014? (a) $3 million (b) $7 million (c) $8 million (d) $11 million 6. When an Egyptian firm purchases a cement mixer from Slovakia, (a) Egyptian investment does not change, Egyptian net exports decrease, Egyptian GDP decreases, Slovakian net exports increase, and Slovakian GDP increases. (b) Egyptian investment increases, Egyptian net exports decrease, Egyptian GDP is unaffected, Slovakian net exports increase, and Slovakian GDP increases. (c) Egyptian investment decreases, Egyptian net exports increase, Egyptian GDP is unaffected, Slovakian net exports decrease, and Slovakian GDP decreases. (d) Egyptian investment increases, Egyptian net exports do not change, Egyptian GDP increases, Slovakian net exports do not change, and Slovakian GDP is unaffected. 7. Suppose an economy produces only cheese and fish. In 2010, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2009, the base year, the price of cheese was $10 per unit and the price of fish was $75 per unit. For 2010, (a) nominal GDP is $500, real GDP is $800, and the GDP deflator is (b) nominal GDP is $500, real GDP is $800, and the GDP deflator is 160. (c) nominal GDP is $800, real GDP is $500, and the GDP deflator is (d) nominal GDP is $800, real GDP is $500, and the GDP deflator is During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person (a) grew by more than 12 percent. (b) grew, but by less than 12 percent. (c) was unchanged. (d) decreased. 9. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007? (a) $0.83 (b) $2.25 (c) $2.50 (d) $ Suppose the price of one liter of milk rises from 1.00 TL to 1.20 TL and the price of a T-shirt rises from 8.00 TL to 9.60 TL. If the CPI rises from 150 to 195, then people likely will buy 2

3 (a) more milk and more T-shirts. (b) more milk and fewer T-shirts. (c) less milk and more T-shirts. (d) less milk and fewer T-shirts. 11. Which of the following statements is true? (a) Even if we know the values of the consumer price index for the years 2009 and 2010, we cannot calculate the inflation rate for 2010 if we do not know which year is the base year. (b) If we know the base year is 1990, and if we know the value of the consumer price index for the year 2010, then we have all the information we need to calculate the inflation rate for (c) If we know the base year is 2000, and if we know the value of the consumer price index for the year 1995, then we have all the information we need to calculate the inflation rate for (d) If we know the base year is 2000, and if we know the value of the consumer price index for the year 1995, then we have all the information we need to calculate the percentage change in the cost of living between 1995 and Which of the following statements about real and nominal interest rates is correct? (a) When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling. (b) If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent. (c) An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an increase in the inflation rate, or both. (d) When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate. 13. In 2009, the imaginary nation of Mainland had a population of 7,000 and real GDP of 210,000. In 2010 the population was 7,300 and real GDP of 223,380. Over the year in question, real GDP per person in Mainland grew by (a) 2 percent, which is high compared to average U.S. growth over the last one-hundred years. (b) 2 percent, which is about the same as average U.S. growth over the last one-hundred years. (c) 4 percent, which is high compared to average U.S. growth over the last one-hundred years. (d) 4 percent, which is about the same as average U.S. growth over the last one-hundred years. 14. Suppose that real GDP grew more in Country A than in Country B last year. (a) Country A must have a higher standard of living than country B. (b) Country A s productivity must have grown faster than country B s. (c) Both of the above are correct. (d) None of the above are correct. 15. If an inexpensive alternative to oil were found, the price of oil adjusted for inflation (a) would decline as the alternative would reduce the demand for oil. (b) would decline as the alternative would reduce the supply of oil. (c) would increase as the alternative would increase the demand for oil. (d) would increase as the alternative would increase the supply of oil. 16. Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double? (a) both output and productivity (b) output, but not productivity (c) productivity, but not output (d) neither productivity nor output 3

4 17. The country of Growpaw does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $4 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Growpaw is $4 billion. What is investment in Growpaw? (a) $5 billion (b) $4 billion (c) $3 billion (d) $11 billion 18. Other things the same, an increase in the interest rate (a) would shift the demand for loanable funds to the right. (b) would shift the demand for loanable funds to the left. (c) would increase the quantity of loanable funds demanded. (d) would decrease the quantity of loanable funds demanded. 19. An increase in the budget deficit would cause a (a) shortage of loanable funds at the original interest rate, which would lead to falling interest rates. (b) surplus of loanable funds at the original interest rate, which would lead to rising interest rates. (c) shortage of loanable funds at the original interest rate, which would lead to rising interest rates. (d) surplus of loanable funds at the original interest rate, which would lead to falling interest rates. 20. As real interest rates fall, firms desire to (a) buy more new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping. (b) buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping. (c) buy less new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping. (d) buy less new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping. 21. Josh is a full-time college student who is not working or looking for a job. Josh is counted as (a) unemployed and in the labor force. (b) unemployed but not in the labor force. (c) in the labor force but not unemployed. (d) neither in the labor force nor unemployed. 22. Suppose that the adult population is 6 million, the number of employed is 3.8 million, and the labor-force participation rate is 70%. What is the unemployment rate? (a) 6.7% (b) 9.5% (c) 10.5% (d) 28% 23. Which of the following is an explanation for the existence of frictional unemployment? (a) efficiency wages (b) minimum-wage laws (c) unions (d) job search 24. Efficiency wages create a (a) shortage of labor and so reduce unemployment. (b) shortage of labor and so raise unemployment. (c) surplus of labor and so reduce unemployment. (d) surplus of labor and so raise unemployment. 4

5 25. The manager of the bank where you work tells you that the bank has $400 million in deposits and $340 million dollars in loans. The Central Bank then raises the reserve requirement from 5 percent to 10 percent. Assuming everything else stays the same, how much is the bank holding in excess reserves after the increase in the reserve requirement? (a) $0 (b) $20 million (c) $40 million (d) $60 million 26. The money supply increases when the Central Bank (a) lowers the discount rate. The increase will be larger the smaller the reserve ratio is. (b) lowers the discount rate. The increase will be larger the larger the reserve ratio is. (c) raises the discount rate. The increase will be larger the smaller the reserve ratio is. (d) raises the discount rate. The increase will be larger the larger the reserve ratio is. 27. If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Central Bank purchases $20 million worth of government bonds, bank reserves (a) increase by $20 million and the money supply eventually increases by $400 million. (b) decrease by $20 million and the money supply eventually decreases by $400 million. (c) increase by $20 million and the money supply eventually increases by $100 million. (d) decrease by $20 million and the money supply eventually decreases by $100 million. 28. During wars the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves (a) and the money supply increase. (b) and the money supply decrease. (c) increase, but leaves the money supply unchanged. (d) decrease, but leaves the money supply unchanged. 29. Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an (a) excess demand for money that will result in an increase in spending. (b) excess demand for money that will result in a decrease in spending. (c) excess supply of money that will result in an increase in spending. (d) excess supply of money that will result in a decrease in spending. 30. When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right (a) the price level must have risen (b) the price level must have fallen. (c) the price level rises if money supply shifts farther than money demand. (d) the price level falls if money supply shifts farther than money demand. 31. There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that (a) velocity rose. If monetary neutrality holds the rise in velocity increased the ratio M/P. (b) velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P. (c) velocity fell. If monetary neutrality holds the fall in velocity increased the ratio M/P. (d) velocity fell. If monetary neutrality holds the fall in velocity decreased the ratio M/P. 32. You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest? (a) 1.5 percent. 5

6 (b) 2.5 percent. (c) 5.0 percent. (d) 4.5 percent. 33. Other things the same, if a country has a trade deficit and saving rises, (a) net capital outflow rises, so the trade deficit increases. (b) net capital outflow rises, so the trade deficit decreases. (c) net capital outflow falls, so the trade deficit increases. (d) net capital outflow falls, so the trade deficit decreases. 34. During some year a country had exports of $50 billion, imports of $70 billion, and domestic investment of $100 billion. What was its saving during the year? (a) $80 billion (b) $100 billion (c) $120 billion (d) $150 billion 35. In Ireland, a pint of beer costs 3 euros. In Australia, a pint of beer costs 4 Australian dollars. If the exchange rate is 0.8 euros per Australian dollar, what is the real exchange rate? (a) 4/2.4 pints of Irish beer per pint of Australian beer (b) 3/3.2 pint of Irish beer per pint of Australian beer (c) 3.2/3 pints of Irish beer per pint of Australian beer (d) 2.4/4 pints of Irish beer per pint of Australian beer 36. If purchasing-power parity holds, when a country s central bank decreases the money supply, its (a) price level rises and its currency appreciates relative to other currencies in the world. (b) price level falls and its currency appreciates relative to other currencies in the world. (c) price level rises and its currency depreciates relative to other currencies in the world. (d) price level falls and its currency depreciates relative to other currencies in the world. 37. In the open-economy macroeconomic model, the demand for Turkish Liras shifts right if at any given exchange rate (a) foreign residents want to buy more Turkish goods and services. (b) Turkish residents want to buy fewer foreign goods and services. (c) Both A and B are correct. (d) None of the above is correct. 38. In the open-economy macroeconomic model, if a country s supply of loanable funds shifts right, then (a) net capital outflow rises, so the exchange rate rises. (b) net capital outflow rises, so the exchange rate falls. (c) net capital outflow falls, so the exchange rate rises. (d) net capital outflow falls, so the exchange rate falls. 39. In 2002, the United States imposed restrictions on the importation of steel into the United States. The openeconomy macroeconomic model shows that such a policy would (a) lower the real exchange rate and increase net exports. (b) lower the real exchange rate and have no effect on net exports. (c) raise the real exchange rate and decrease net exports. (d) raise the real exchange rate and have no effect on net exports. 40. When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds (a) and U.S. net capital outflow rose. (b) and U.S. net capital outflow fell. (c) fell and U.S. net capital outflow rose. (d) rose and U.S. net capital outflow fell. 6

7 41. According to the classical model, an increase in the money supply causes (a) output to increase in the long run. (b) the unemployment rate to fall in the long run. (c) prices to rise in the long run. (d) interest rates to fall in the long run. 42. Which of the following rises when the Turkish price level falls? (a) interest rates (b) the value of TL in the market for foreign-currency exchange (c) real wealth (d) All of the above are correct. 43. The aggregate quantity of goods and services demanded changes as the price level rises because (a) real wealth falls, interest rates rise, and the dollar appreciates. (b) real wealth falls, interest rates rise, and the dollar depreciates. (c) real wealth rises, interest rates fall, and the dollar appreciates. (d) real wealth rises, interest rates fall, and the dollar depreciates. 44. As the price level rises, the exchange rate (a) falls, so exports rise and imports fall. (b) falls, so exports fall and imports rise. (c) rises, so exports rise and imports fall. (d) rises, so exports fall and imports rise. 45. Other things the same, if the price level rises, people (a) increase foreign bond purchases, so the domestic currency appreciates. (b) increase foreign bond purchases, so the domestic currency depreciates. (c) increase domestic bond purchases, so the domestic currency appreciates. (d) increase domestic bond purchases, so the domestic currency depreciates. 46. Other things the same, an increase in the price level causes the interest rate to (a) increase, the domestic currency to depreciate, and net exports to increase. (b) increase, the domestic currency to appreciate, and net exports to decrease. (c) decrease, the domestic currency to depreciate, and net exports to increase. (d) decrease, the domestic currency to appreciate, and net exports to decrease. 47. Which of the following both shift aggregate demand left? (a) a decrease in taxes and at a given price level consumers feel more wealthy (b) a decrease in taxes and at a given price level consumers feel less wealthy (c) an increase in taxes and at a given price level consumers feel more wealthy (d) an increase in taxes and at a given price level consumers feel less wealthy 48. When the money supply decreases (a) interest rates fall and so aggregate demand shifts right. (b) interest rates fall and so aggregate demand shifts left. (c) interest rates rise and so aggregate demand shifts right. (d) interest rates rise and so aggregate demand shifts left. 49. Which of the following is correct? (a) An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. (b) An increase in stock prices reduces consumption spending so that aggregate demand shifts left. 7

8 (c) An increase in the price level causes the exchange rate to rise so that aggregate demand shifts left. (d) A recession in other countries reduces Turkish net exports so that Turkish aggregate demand shifts left. 50. Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to (a) rising prices only. (b) rising real GDP only. (c) rising prices and rising real GDP. (d) neither rising prices nor rising real GDP. 51. If there are sticky wages, and the price level is greater than what was expected, then (a) the quantity of aggregate goods and services supplied falls, which is shown by a shift of the short-run aggregate supply curve to the left. (b) the quantity of aggregate goods and services supplied falls, as shown by a movement to the left along the short-run aggregate supply curve. (c) the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-run aggregate supply curve to the right. (a) right, and an increase in the actual price level shifts short-run aggregate supply to the right. (b) right, and an increase in the actual price level does not shift short-run aggregate supply. (c) left, and an increase in the actual price level shifts short-run aggregate supply to the left. (d) left, and an increase in the actual price level does not shift short-run aggregate supply. 54. Suppose the economy is in long-run equilibrium. If there is an increase in government purchases at the same time there is a large increase in the price of oil, then in the short-run (a) real GDP will rise and the price level might rise, fall, or stay the same. (b) real GDP will fall and the price level might rise, fall, or stay the same. (c) the price level will rise, and real GDP might rise, fall, or stay the same. (d) the price level will fall, and real GDP might rise, fall, or stay the same. Figure 2. (d) the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve. 52. People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this? (a) both sticky price theory and sticky wage theory (b) sticky price theory but not sticky wage theory (c) sticky wage theory but not sticky price theory (d) neither sticky wage theory nor sticky price theory 53. An increase in the expected price level shifts short-run aggregate supply to the 55. Refer to Figure 2 above. Which of the long-run aggregatesupply curves is consistent with a short-run economic expansion? (a) LRAS1 (b) LRAS2 (c) LRAS3 (d) Both LRAS1 and LRAS3 8

9 Figure 3. (c) withdraw money from interest-bearing accounts, and the interest rate will fall. (d) withdraw money from interest-bearing accounts, and the interest rate will rise. 59. If the Central Bank decided to raise interest rates, it could (a) buy bonds to lower the money supply. (b) buy bonds to raise the money supply. (c) sell bonds to lower the money supply. (d) sell bonds to raise the money supply. 56. Refer to Figure 3 above. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to (a) V in the long run. (b) W in the long run. (c) X in the long run. (d) Z in the long run. 57. According to the liquidity preference theory, an increase in the overall price level of 10 percent (a) increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded. (b) decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded. (c) increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged. (d) decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged. 58. If there is excess money supply, people will (a) deposit more into interest-bearing accounts, and the interest rate will fall. (b) deposit more into interest-bearing accounts, and the interest rate will rise. 60. If the Central Bank conducts open-market sales, which of the following quantities increase(s)? (a) interest rates, prices, and investment spending (b) interest rates and prices, but not investment spending (c) interest rates and investment, but not prices (d) interest rates, but not investment or prices 61. In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is It follows that, when income is $450, consumer spending is (a) $360. For this economy, an initial increase of $50 in consumer spending translates into a $ increase in aggregate demand. (b) $360. For this economy, an initial increase of $50 in consumer spending translates into a $ increase in aggregate demand. (c) $ For this economy, an initial increase of $50 in consumer spending translates into a $ increase in aggregate demand. (d) $ For this economy, an initial increase of $50 in consumer spending translates into a $ increase in aggregate demand. 62. Which of the following correctly explains the crowdingout effect? (a) An increase in government expenditures decreases the interest rate and so increases investment spending. 9

10 (b) An increase in government expenditures increases the interest rate and so reduces investment spending. (c) A decrease in government expenditures increases the interest rate and so increases investment spending. (d) A decrease in government expenditures decreases the interest rate and so reduces investment spending. 63. Assume there is a multiplier effect and some crowding out effect. An increase in government expenditures changes aggregate demand more, (a) the smaller the MPC and the stronger the influence of income on money demand. (b) the smaller the MPC and the weaker the influence of income on money demand. (c) the larger the MPC and the stronger the influence of income on money demand. (d) the larger the MPC and the weaker the influence of income on money demand. 64. Assume the MPC is Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the (a) left by about $30.77 billion. (b) left by about $57.1 billion. (c) right by about $57.1 billion. (d) right by about $30.77 billion. 65. Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion? (a) both the multiplier effect and the crowding-out effect (b) the multiplier effect, but not the crowding-out effect (c) the crowding-out effect, but not the multiplier effect (d) neither the crowding out effect nor the multiplier effect 66. If a $1000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is (a) 0.2 and the multiplier is (b) 0.8 and the multiplier is 5. (c) 0.2 and the multiplier is (d) 0.8 and the multiplier is If businesses and consumers become pessimistic, the Central Bank can attempt to reduce the impact on the price level and real GDP by (a) increasing the money supply, which raises interest rates. (b) increasing the money supply, which lowers interest rates. (c) decreasing the money supply, which raises interest rates. (d) decreasing the money supply, which lowers interest rates. 68. A reduction in Turkish net exports would shift Turkish aggregate demand (a) rightward. In an attempt to stabilize the economy, the government could increase expenditures. (b) rightward. In an attempt to stabilize the economy, the government could decrease expenditures. (c) leftward. In an attempt to stabilize the economy, the government could increase expenditures. (d) leftward. In an attempt to stabilize the economy, the government could decrease expenditures. 69. The primary argument against active monetary and fiscal policy is that (a) attempts to stabilize the economy do not constitute a proper role for government in a democratic society. (b) these policies affect the economy with a long lag. (c) these policies affect the economy too quickly and with too much impact. (d) history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income. 10

11 70. In his famous article published in an economics journal in 1958, A.W. Phillips (a) used data for the United States to show a negative relationship between the rate of change of the U.S. consumer price index and the U.S. unemployment rate. (b) used data for the United States to show a negative relationship between the rate of change of wages in the U.S. and the U.S. unemployment rate. (c) used data for the United Kingdom to show a negative relationship between the rate of change of the U.K. consumer price index and the U.K. unemployment rate. (d) used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate. 71. If policymakers expand aggregate demand, then in the long run (a) prices will be higher and unemployment will be lower. (b) prices will be higher and unemployment will be unchanged. (c) prices and unemployment will be unchanged. (d) None of the above is correct. Figure Refer to Figure 4 above. Assume the figure depicts possible outcomes for the year In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was (a) 144. (b) 150. (c) 152. (d) Refer to Figure 4 above. Assume the figure charts possible outcomes for the year In 2018, the economy is at point B on the left-hand graph, which corresponds to point B on the right-hand graph. Also, point A on the left-hand graph corresponds to A on the right-hand graph. The price level in the year 2018 is (a) (b) (c) (d) A policy that raised the natural rate of unemployment would shift (a) both the short-run and the long-run Phillips curves to the right. (b) the short-run Phillips curve right but leave the longrun Phillips curve unchanged. (c) the long-run Phillips curve right but leave the shortrun Phillips curve unchanged. (d) neither the long-run Phillips curve nor the short-run Phillips curve right. 75. If people anticipate higher inflation, but inflation remains the same then In Figure 4 above, the left-hand graph shows a shortrun aggregate-supply (SRAS) curve and two aggregatedemand (AD) curves, with the price level on the vertical axis, and Y represents output. On the right-hand diagram, U represents the unemployment rate, with the inflation rate on the vertical axis. (a) the short-run Phillips curve would shift right and unemployment would rise. (b) the short-run Phillips curve would shift right and unemployment would fall. (c) the short-run Phillips curve would shift left and unemployment would rise. 11

12 (d) the short-run Phillips curve would shift left and unemployment would fall. 76. If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? (a) both the price level and output (b) the price level but not output (c) output but not the price level (d) neither output nor the price level 77. A favorable supply shock will cause inflation to (a) rise and shift the short-run Phillips curve right. (b) rise and shift the short-run Phillips curve left. (c) fall and shift the short-run Phillips curve right. (d) fall and shift the short-run Phillips curve left. 78. Disinflation would eventually cause (a) the short-run and the long run Phillips curve to shift right. (b) the short-run and the long run Phillips curve to shift left. (c) the short-run Phillips curve but not the long run Phillips curve to shift right. (d) the short-run Phillips curve but not the long run Phillips curve to shift left. 79. If a central bank reduced inflation by 2 percentage points and that made output fall by 1 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is (a) 1/2. (b) 1. (c) 2. (d) Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment (a) rises. As inflation expectations adjust, the short-run Phillips curve shifts right. (b) rises. As inflation expectations adjust, the short-run Phillips curve shifts left. (c) falls. As inflation expectations adjust, the short-run Phillips curve shifts right. (d) falls. As inflation expectations adjust, the short-run Phillips curve shifts left. 12