Question

1. Which of the following best describes the relationship between inflation and unemployment?

A) As inflation increases, unemployment will always increase

B) It includes periods in which there is a trade-off between the two, but is overall more nuanced and varied

C) There is never a trade-off between inflation and unemployment

D) It adheres to the Phillips curve trade-off in both the short and long run time periods

2. A large decrease in government purchases due to a reduction in the services offered to the public would most likely be considered an example of

A) contractionary fiscal policy

B) a tax decrease

C) expansionary fiscal policy

D) an automatic stabilizer

3. Lags in fiscal policy can occur for a number of reasons, including

A) the lengthy process of implementation, for example the time taken to pass bills in Congress.

B) the ease of recognizing when recessionary and inflationary gaps are occurring.

C) automatic stabilizers.

D) the inability to increase or decrease the money supply.

Answer 1

Answer 1) there is a trade off between inflation rate and the unemployment rate depicted by the Philips curve. Hence option D is the correct answer.

Answer 2) large decrease in the government expenditure depicts a fiscal contraction. Hence option A is the correct answer.

Answer 3) lag in fiscal policy occurs due to the policy paralysis in the Congress and Senate. Hence option A is the correct answer.