Question

Question 3

Which statement fails to describe the behavior of the Phillips curve?

A. When output falls short of its potential, inflation decreases.

B. nflation changes are positively correlated with short-run output.

C. A steeper Phillips curve causes inflation to necessarily increase.

D. When output is at potential, inflation remains constant.

E. When the economy is booming, inflation increases.

Question 4

An increase in consumer expenditures during the holiday season, a decrease in purchases of U.S. goods by foreigners, a tax increase, and a decline in new home starts are examples of:

A. a monetary policy

B. expectations

C. an aggregate demand shock

D. Ricardian equivalence

E. an aggregate supply shock

Answer 1

Question 3.

A. When output falls short of its potential, inflation decreases.

Explanation - This statement fails to capture the behaviour of Philips curve. According to Philips curve, the rate of unemployment and inflation have an inverse relationship. As a result, a fall in employment (or a rise in unemployment) i.e., the when the output falls short of its potential level, the rate of inflation should increase rather than decrease.

Question 4.

C. An aggregate demand shock

Explanation - The sudden change in the aggregate demand, which results in an event of temporary increase or decrease of the aggregate demand due to any factor is known as aggregate demand shock.