4.2.3.4 Possible conflicts between macroeconomic policy objectives Quiz: AQA Economics, Unit 2

The 20 questions

1. What does the short-run Phillips curve show?

   • A direct relationship between productivity and the price level
   • A direct relationship between the money supply and the exchange rate, which shows that rising money supply always strengthens the currency
   • An inverse relationship between the rate of inflation and the rate of unemployment
   • A fixed rate of unemployment at every level of inflation

2. What is the shape of the long-run Phillips curve?

   • Downward sloping, showing a trade-off at all times
   • Upward sloping, showing that unemployment rises with inflation
   • L-shaped, and vertical at the natural rate of unemployment
   • Horizontal, showing inflation is always constant

3. Which name is also used for the long-run Phillips curve?

   • The vertical long-run Phillips curve
   • The upward sloping aggregate supply curve
   • The horizontal short-run Phillips curve
   • The downward sloping expectations curve

4. A negative output gap is most closely linked to which pair of outcomes?

   • Lower inflationary pressure and higher unemployment
   • Higher inflation and higher unemployment at the same time
   • Lower inflation and lower unemployment at the same time
   • Higher inflationary pressure and lower unemployment

5. A positive output gap is most closely linked to which pair of outcomes?

   • Higher inflationary pressure and lower unemployment
   • Lower inflation and higher productivity
   • Higher unemployment and lower interest rates
   • Lower inflationary pressure and higher unemployment

6. Which view argues that the major macroeconomic objectives are compatible in the long run?

   • The view that unemployment can be permanently reduced by demand
   • The monetarist and supply-side view
   • The view that inflation must always rise with growth
   • The Keynesian demand-management view in a recession

7. Which policy conflict arises when expansionary policy reduces unemployment but raises inflation?

   • A trade-off between growth and the exchange rate in the long run
   • A conflict between productivity and wage levels in all periods
   • A conflict between the current account and the budget balance
   • A trade-off between unemployment and inflation in the short run

8. Unemployment is 5 per cent with inflation at 2 per cent. Later unemployment is 4 per cent with inflation at 4 per cent. What does this movement illustrate?

   • A fall in the natural rate of unemployment
   • A movement along a short-run Phillips curve, with lower unemployment and higher inflation
   • A rise in productivity that lowers inflation
   • A shift of the long-run Phillips curve to the right, which means the natural rate of unemployment has risen permanently in the economy

9. An expansionary demand-side policy is used in the short run. Which outcome is most consistent with an AD/AS analysis?

   • Unemployment and inflation both fall as output rises
   • Unemployment falls and inflation rises as output moves above potential
   • Unemployment and inflation both rise as SRAS moves left
   • Unemployment rises and inflation falls as output moves below potential

10. The natural rate of unemployment is 5 per cent, and unemployment is held at 3 per cent by demand expansion. What is the likely long-run outcome?

    • The economy stays at 3 per cent unemployment with stable inflation indefinitely
    • Inflation accelerates as expectations adjust, because unemployment is below the natural rate
    • Inflation falls steadily, because unemployment below the natural rate reduces costs
    • Unemployment rises back to 3 per cent permanently and inflation stays constant, because expectations never change in the long run

11. A supply-side policy reduces the natural rate of unemployment. What does this do to the long-run Phillips curve?

    • It shifts the long-run Phillips curve to the right, raising the natural rate
    • It shifts the vertical long-run Phillips curve to the left, reducing the natural rate
    • It makes the long-run Phillips curve downward sloping, offering a permanent trade-off
    • It has no effect on the long-run Phillips curve

12. What is a key policy implication of the L-shaped long-run Phillips curve?

    • Unemployment has no relationship with inflation at any time
    • Demand management can permanently reduce unemployment to zero
    • Demand management cannot permanently reduce unemployment below the natural rate
    • Governments should always accept higher inflation to reduce unemployment, since the long-run cost of inflation is always small

13. The economy experiences rising unemployment and rising inflation at the same time. Which explanation is most consistent with this?

    • A leftward shift of SRAS caused by cost-push pressures
    • A fall in the money supply with a rise in productivity
    • A fall in aggregate demand with a fall in costs
    • A rightward shift of LRAS caused by technology

14. Which policy best reconciles unemployment and inflation objectives in the long run?

    • Supply-side policies such as training that lower the natural rate of unemployment
    • A permanent cut in interest rates to keep inflation rising
    • A permanent increase in government spending to reduce unemployment, financed by borrowing that never needs to be repaid
    • A fixed exchange rate that prevents any change in unemployment

15. An economy has unemployment of 6 per cent and inflation of 1 per cent. Which policy is most appropriate in the short run?

    • A fall in the exchange rate, because it always reduces unemployment
    • Expansionary demand-side policy, because inflation is low and unemployment is high
    • A rise in the money supply only, with no change in taxes or spending
    • Contractionary demand-side policy, because inflation is low and unemployment is high

16. Evaluate whether the conflict between policy objectives can be fully reconciled.

    • Fully, because supply-side policies remove all trade-offs at once
    • Not at all, because the long-run Phillips curve is downward sloping, so demand policy can lower unemployment without raising inflation
    • Only partly, since supply-side measures can lower the natural rate but short-run trade-offs and time lags remain
    • Fully, because demand policy has no effect on inflation at any time

17. Why might the short-run Phillips curve shift when inflation expectations change?

    • Expectations affect only the exchange rate, not the Phillips curve
    • Expected inflation has no effect on wage and price setting
    • Workers and firms adjust wage and price setting to expected inflation, shifting the trade-off
    • The curve shifts only when productivity changes in the long run, and expectations of inflation have no part in its position

18. What sequence best describes the effect of a rise in government spending in a recession, under the AD/AS model?

    • Aggregate supply shifts right, prices fall and unemployment rises
    • Aggregate supply shifts left, output rises and unemployment falls
    • Aggregate demand shifts left, output falls and unemployment rises, with prices falling as firms cut their costs in response
    • Aggregate demand shifts right, output rises and unemployment falls, with some upward pressure on prices

19. Which is the best evaluation of the monetarist view that objectives are compatible in the long run?

    • It is entirely wrong, because there is no link between growth and unemployment
    • It is irrelevant, because the Phillips curve has no role in policy and the trade-off between inflation and unemployment never changes
    • It is always correct, because short-run trade-offs never exist
    • It is useful, but it depends on the economy's ability to adjust, and short-run conflicts may last for years

20. A government wants lower unemployment without accelerating inflation. Which statement best explains why this is harder than it looks?

    • The natural rate is always zero, so unemployment can be reduced without limit
    • Pushing unemployment below the natural rate raises inflation over time as expectations adjust
    • Inflation has no link with wages, so the policy has no costs
    • Lower unemployment always reduces inflation, so the policy is easy to implement once the central bank has set a clear target

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