Ch.

9 Output, Inflation, and Unemployment: Alternative Views

MCQs

1. The theory of natural rate of unemployment and output was developed as a part of Monetarist
system by:
a) Milton Friedman b) J.M. Keynes c) Adam Smith d) Alfred Marshal
2. The Monetarist theory was developed independently by:
a) Milton Friedman b) Edmund Phelps c) J.M. Keynes d) Modigliani
3. In Monetarist view, the ____________ changes in the money supply are the primary
determinant of fluctuations in output and employment:
a) Long run b) No c) Short run d) None of these
4. As per Monetarist, in the long run the fluctuation in output and employment are purely affected
by:
a) Real factors b) Monetary factors c) Fiscal Policy d) All of these
5. Real/supply-side factors are:
a) Consumption and Investment b) Labour, Capital & Technology c) None of these
6. Natural Rate Theory describes that there exists __________ in labour and product markets
which is determined by real/supply side factors:
a) Equilibrium b) Divergence c) No equilibrium d) None of these
7. Monetarists argue that changes in aggregated demand could cause _________ movements of
the economy away from the natural rate:
a) Permanent b) Temporary c) No d) None of these
8. The rate which has the property that it is consistent with equilibrium in the structure of real
wage rate, is known as __________ of unemployment:
a) Constant b) Variable c) Natural d) All of these
9. Number of unemployed as a percentage of total labour force measures __________ of
unemployment:
a) Constant b) Variable c) Natural d) All of these
10. In Friedman’s Model real wage is not known by the labour supplies and their decisions depend
upon _________ real wage:
a) Expected b) Forecasted c) Surveyed d) None of these
11. The schedule showing the relationship between unemployment and inflation, is known as
___________ curve:
a) Indifference b) Philips c) Level d) All of these
12. As supplier of labour anticipate that prices are rising, the Philips curve will shift _______ to the
right:
a) Downward b) Leftward c) Upward d) None of these
13. Keynesian model supports long run vertical Philips curve but draw ________ policy conclusions
as Monetarist model:
a) Differentiated b) Similar c) Indifferent d) All of these
14. Monetarist follow ________ and Keynesians follow __________ policies in demand
management:
 a) Activist / Non-interventionist c) Activist / Activist
b) Non-Interventionist / Activist d) Non-Interventionist / Non-Interventionist
15. In Keynesian view the aggregate demand policies are aimed at _________ output and
employment in the short run:
a) Normalizing b) Destabilizing c) Stabilizing d) None of these
16. In Keynesians view private-sector aggregate demand is unstable primarily because of the
___________ of investment demand:
a) Instability b) Stability c) No Decrease d) No increase
17. One of the determinant of Natural Rate of Unemployment, as described by Friedman, is:
a) Market imperfections c) Cost of mobility
b) Variability in Demand and Supply d) All of these
18. Historical data shows that the Natural Rate of Unemployment is ___________ in nature:
a) Time In-varying b) Time Varying c) Time Consistent d) None of these
19. One possible reason of increasing trend in Natural Rate of Unemployment in European countries
is:
a) Rigidity in Labour Market c) Hysteresis
b) Labour from lower wage countries d) All of these
20. The current value of unemployment rate may be strongly influenced by its past values. This
property is called:
a) Rigidity in Labour Market c) Hysteresis
b) Labour from lower wage countries d) All of these

ANSWER KEY

1. (a) 2. (b) 3. (c) 4. (a) 5. (b) 6. (a)

7. (b) 8. (c) 9. (c) 10. (a) 11. (b) 12. (c)

13. (a) 14. (b) 15. (c) 16. (a) 17. (d) 18. (b)

19. (d) 20. (c)

SHORT QUESTIONS:

1. Describe and draw Philips Curve in the Short-Run (Figure: 2)

2. Describe relationship between Short-Run and Long-Run Philips Curve (Figure:3)
3. Describe and draw Philips Curve in the Long-Run (Figure: 4)
4. Discuss Short-Run effects of increase in aggregate demand in the Keynesian Model (Figure:5)
5. Discuss Long-Run effects of increase in aggregate demand in the Keynesian Model (Figure:7)
6. What are three major reasons which explain changing Natural Rate of Unemployment
(Page:195)
7. Briefly elaborate the Natural Rate Theory

LONG QUESTIONS:
1. What you know about Monetary Policy, Output and Inflation in the perspective of Friedman’s
Monetarist View: A Long Run Analysis (Page: 186, Figures: 3 & 4)
2. Write down a detailed note on Output-Inflation Trade-Off in the perspective of Keynesians View:
Short Run and Long Run Philips Curve (Page:189, Figures: 5,6 & 7)
3. Explain the evolution of Natural Rate concept (Page: 193)
Ch. 10 New Classical Economics

MCQs

1. The _________ economics is developed against the background of high inflation and
unemployment:
a) New Classical b) Classical c) Keynesian d) Monetarist
2. The New Classical economics is originally developed by:
a) Milton Friedman b) J. M Keynes c) Robert Lucas d) None of these
3. New Classical economists believe that Keynesian structure is fundamentally _________ system:
a) Ideal b) Flawed c) Realistic d) All of these
4. New Classical economists do not believe that aggregate _________ management could cause
fluctuations in the short run:
a) Supply b) Exchange c) Demand d) Distribution
5. Keynesian assumption regarding price expectation assumes that labour suppliers form
expectations about current price level on the basis of __________ behaviour of prices:
a) Past b) Current c) Future d) None of these
6. Aggregate demand management has not the force to change equilibrium even in the short run.
This is the basic “New Classical Policy ___________ Proposition”:
a) Effectiveness b) Ineffectiveness c) Management d) None of these
7. Expectations formed intelligently on the basis of all available relevant information concerning
the variable being predicted, are known as __________ expectations:
a) Realistic b) Original c) Rational d) All of these
8. Keynesian and Monetarist models used to assume _______ looking nature of expectation for
macroeconomic analysis:
a) Backward b) Forward c) Upward d) Downward
9. New Classical Economic model (Rational Expectations) used to assume _______ looking nature
of expectation for macroeconomic analysis:
a) Backward b) Forward c) Upward d) Downward
10. When expectations are assumed to be rational then anticipated and unanticipated policy
changes have very ________ effects:
a) Similar b) Convergent c) Different d) None of these
11. Anticipated policy changes regarding components of Aggregate Demand, ________ the force to
change equilibrium level of output and employment:
a) Have b) Have not c) Follow d) None of these
12. Unanticipated changes regarding components of Aggregate Demand, ________ the force to
change equilibrium level of output and employment:
a. Have b) Have not c) Follow d) None of these
13. In New Classical Economic Model there is _______ need for a stabilization policy response to an
anticipated demand change:
a) Dire b) No c) Constant d) All of these
14. The stabilization policy response for unanticipated demand change in New Classical Model, is
even desirable but not _________:
a) Effective b) Ineffective c) Feasible d) All of these
ANSWER KEY:

1. (a) 2. (c) 3. (b) 4. (c) 5. (a) 6. (b)

7. (c) 8. (a) 9. (b) 10. (c) 11. (b) 12. (a)
13. () 14. () 15. () 16. () 17. () 18. ()
19. () 20. ()

SHORT QUESTIONS:

1. Define New Classical Policy Ineffectiveness Proposition (Page: 200)

2. What you know about rational expectations (Page 201)
3. Use diagram to briefly explain output and employment in the New Classical Model (Figure: 1)
4. What is the effect of an increase in the Money Supply in New Classical Model (Figure: 2)
5. What is the effect of an autonomous decline in investment in New Classical Model (Figure: 3)
6. You are required to review the Keynesian Position for equilibrium in output and employment
(Page: 201)
7. Mention a broader view of the New Classical Position (Page: 209)

LONG QUESTIONS:

1. Explain rational expectation concept and its implications (Page: 201, Figure: 1 & 2)
2. Discuss a broader view of the New Classical Position (Page: 209) and what policy conclusions
they draw? (Page: 206, Figure: 3)
3. You are required to mention Keynesian counter critique against New Classical Economics