Lec15 iC Questions Flashcards
Which of the following would cause the Phillips curve to shift up?
a) An increase in government spending
b) A reduction of the interest rate by the central bank
c) An increase in the cost of imported materials
d) An increase in investment spending by businesses
e) None of the above
c) An increase in the cost of imported materials
Which of the following would cause a movement to the left along the Phillips curve?
a) A shift down of the MP curve
b) A shift up of the Phillips curve
c) A shift to the right of the IS curve
d) A shift up of the MP curve
e) None of the above
d) A shift up of the MP curve
“We want to shift the MP curve up to generate the negative output gap, which generates the downward movement along the Phillips curve”
Many people argue that inflation is caused by the government printing money. Consider the IS-MP-PC model. When the government creates new money, this leads to inflation because:
a) Expected inflation rises, causing actual inflation to rise
b) The IS curve shifts right, leading to demand-pull inflation
c) The Phillips curve shifts up, leading to cost-push inflation
d) None of the above, but inflation still happens
e) Creating money doesn’t cause inflation
b) The IS curve shifts right, leading to demand-pull inflation
e) Creating money doesn’t cause inflation
In comparison to long-run equilibrium, a negative output gap is generally associated with:
a) Lower total unemployment
b) Higher frictional unemployment
c) Lower structural unemployment
d) Higher cyclical unemployment
e) None of the above
d) Higher cyclical unemployment
“Cyclical Unemployment is output gap unemployment”
Which of the following would cause higher demand-pull inflation?
a) IS curve shifts right
b) IS curve shifts left
c) MP curve shifts up
d) Phillips curve shifts down
e) More than one of the above
a) IS curve shifts right
The economy starts in long-run equilibrium, with actual GDP equal to potential GDP, and inflation at 2% as expected. The United States goes into an economic boom with GDP and incomes rising. What is the effect in Canada?
a) IS curve shifts right
b) IS curve shifts left
c) MP curve shifts down
d) Phillips curve shifts down
e) More than one of the above
a) IS curve shifts right
The economy starts in long-run equilibrium, with actual GDP equal to potential GDP, and inflation at 2% as expected. The government of Canada lowers tax rates. The effect in Canada is:
a) A decrease in GDP and a decrease in inflation
b) A decrease in GDP and an increase in inflation
c) An increase in GDP and a decrease in inflation
d) An increase in GDP and an increase in inflation
e) None of the above
d) An increase in GDP and an increase in inflation
“A lower tax rate is a spending shock, leads to higher consumption spending, leads to an increase in GDP, IS curve goes to the right, generates demand-pull inflation”
The economy starts with a positive output gap, low unemployment and higher than expected inflation. The Bank of Canada raises interest rates. This causes:
a) An increase in GDP and a decrease in inflation
b) An increase in GDP and an increase in inflation
c) A decrease in GDP and a decrease in inflation
d) A decrease in GDP and an increase in inflation
e) None of the above
c) A decrease in GDP and a decrease in inflation
“We have a positive output gap, low unemployment, high unexpected inflation. This is the scenario where the Bank of Canada would normally raise interest rates. Raising interest rates lead to a decrease in GDP, increase in unemployment, and a decrease in inflation. In general, interest rates have a trade off where monetary policy is either going to increase unemployment and reduce inflation or vice versa.”
The economy starts in long-run equilibrium, and then GDP rises, the real interest rate falls, and inflation rises. What is the most likely cause?
a) The IS curve shifted to the right
b) The MP curve shifted down
c) The Phillips curve shifted up
d) None of the above
b) The MP curve shifted down
“If the interest rate falls, that means the MP curve shifted down. That will cause GDP to rise, unemployment to fall, inflation to rise”
The economy starts in long-run equilibrium, and then unemployment rises, inflation falls, and the real interest rate is unchanged. What is the most likely cause?
a) The Bank of Canada reduced the overnight interest rate
b) The price of imported raw materials increased
c) There was an increase in government purchases
d) There was a decrease in business optimism
e) None of the above
d) There was a decrease in business optimism
“Real interest rate is unchanged, MP curve doesn’t move. Unemployment rises means we need a negative output gap. If the MP curve didn’t move, to get a negative output gap, the IS curve has to go left.”
Statistics Canada determines that both inflation and unemployment have increased, while interest rates have decreased. What is the most likely cause?
a) Government spending has increased
b) Input costs have increased, and the Bank of Canada has lowered interest rates
c) Taxation has increased, and the Bank of Canada has lowered interest rates
d) Input costs have increased, investment has fallen, and the Bank of Canada has lowered interest rates
e) None of the above
d) Input costs have increased, investment has fallen, and the Bank of Canada has lowered interest rates
“We need inflation and unemployment to go up, and interest rates to go down. Interest rates fall means that MP curve goes down, this might cause demand-pull inflation. One of the challenges is if you have a negative output gap and higher than expected inflation, it has to be true that the PC shifted up because there is no other way to get that higher than expected inflation”
Following the initial COVID outbreak in Canada, inflation, GDP, and interest rates dropped substantially. Which of the following is a likely cause?
a) Phillips curve shifts down
b) IS curve shifts right and MP curve shifts down
c) IS curve shifts left and Phillips curve shifts up
d) IS curve shifts left and MP curve shifts down
e) None of the above
d) IS curve shifts left and MP curve shifts down
“The MP curve shifts down (interest rates drop), and we need a large shift in the IS curve to get lower GDP, lower inflation, and lower interest rates”
By June of 2022, GDP had risen and unemployment was below the long-run equilibrium. In addition, inflation was very high and interest rates were above long-run average rates. Which of the following is a likely cause?
a) Phillips curve shifts up and the IS curve shifts right
b) IS curve shifts right, MP curve shifts up, and the Phillips curve shifts up
c) MP curve shifts down
d) IS curve shifts right
e) None of the above
b) IS curve shifts right, MP curve shifts up, and the Phillips curve shifts up
“Interest rates are higher than normal, we have a positive output gap, we have inflation. The IS curve shifting right, and the MP curve not moving up fast enough to take control of it would be enough to get the answer that we need (not one of the options). We also see the Phillips curve shift up and that gets the higher inflation than we would otherwise expect because of a positive output gap and because of input cost”
