Question 1

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

Accepted Answer

A) True 
 B)False

Question 2

Figure 28-9 
-Refer to Figure 28-9. A(n)  ________ would be depicted as a movement from A to D to C.

Accepted Answer

A)   supply shock, such as rising oil prices,
B)   increase in aggregate demand
C)   implementation of contractionary monetary policy
D)   increase in short-run aggregate supplyE) A) and B)
F) C) and D)

Question 3

The natural rate of unemployment will not change following an increase in ________ unemployment.

Accepted Answer

A)   cyclical
B)   frictional
C)   structural
D)   all of the aboveE) None of the above
F) A) and B)

Question 4

If the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see?

Accepted Answer

A)   an upward shift of the short-run Phillips curve
B)   a downward shift of the short-run Phillips curve
C)   a decrease in the long-run aggregate supply curve
D)   Both B and C are correct answers.E) A) and D)
F) B) and D)

Question 5

Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?

Accepted Answer

A)   Gretchen's real wage will be unchanged.
B)   Gretchen's real wage will fall.
C)   Gretchen's real wage will rise.
D)   Gretchen's real wage may rise or fall, depending on the unemployment rate.E) B) and C)
F) B) and D)

Question 6

What does it mean to say that workers and firms have rational expectations?

Accepted Answer

Rational expectations means that workers...

Question 7

Workers at a local mining company are paid $25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate.

Accepted Answer

If actual inflation is 3%, a 3% increase...

Question 8

Figure 28-9 
-Refer to Figure 28-9. Fed Chairman Paul Volcker's response to the ________ of the late 1970s is depicted in the figure above as a movement from C to D to A.

Accepted Answer

A)   deflation
B)   high unemployment
C)   high inflation
D)   appreciation of the dollarE) A) and B)
F) A) and C)

Question 9

A reduction in the rate of inflation is referred to as

Accepted Answer

A)   unemployment.
B)   recession.
C)   disinflation.
D)   deflation.E) A) and B)
F) A) and C)

Question 10

According to real business cycle models

Accepted Answer

A)   the long-run Phillips curve is negatively sloped.
B)   the economy is normally operating below the natural rate of unemployment.
C)   unexpected changes in monetary policy are the major source of fluctuations in real GDP.
D)   the economy is normally at potential GDP.E) A) and B)
F) B) and D)

Question 11

The price level in the economy between 2016 and 2017 rose from 100 to 110. Between 2017 and 2018, the price level rose from 110 to 121. How does the short-run Phillips curve predict the unemployment rate will change as a result?

Accepted Answer

A)   The unemployment rate will decrease since inflation decreased.
B)   The unemployment rate will decrease since inflation increased.
C)   The unemployment rate will increase since inflation increased.
D)   The unemployment rate will not change since there is no change in the rate of inflation.E) A) and C)
F) A) and D)

Question 12

If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

Accepted Answer

A)   3 percent
B)   more than 3 percent
C)   less than 3 percent
D)   depends on actual inflation for next yearE) B) and C)
F) All of the above

Question 13

If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?

Accepted Answer

A)   As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation.
B)   As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation.
C)   If the Fed's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation.
D)   Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of Fed's policy announcement.E) A) and C)
F) A) and B)

Question 14

Figure 28-1 
-Refer to Figure 28-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

Accepted Answer

A)   buy treasury bills
B)   sell treasury bills
C)   lower the discount rate
D)   increase the money supply
E)   lower taxesF) D) and E)
G) A) and B)

Question 15

One problem with deflation is that it can raise the real value of debt.

Accepted Answer

A) True 
 B)False

Question 16

All of the following have enhanced the Fed's credibility in conducting monetary policy except

Accepted Answer

A)   following through with changes it has announced.
B)   revealing the Fed's target for the federal funds rate.
C)   making the minutes of the open market committee meetings public.
D)   discontinuing the policy of announcing whether it considered the economy to be at greater risk of inflation or recession following each FOMC meeting.E) C) and D)
F) A) and B)

Question 17

In the 1960s, many economists and policymakers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________, who argued that there is not trade-off between inflation and unemployment in the long run.

Accepted Answer

A)   Robert Lucas and Thomas Sargent
B)   Finn Kydland and Edward Prescott
C)   Paul Samuelson and James Tobin
D)   Milton Friedman and Edmund PhelpsE) None of the above
F) All of the above

Question 18

In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.

Accepted Answer

A)   disinflation; high unemployment
B)   steep inflation; low unemployment
C)   disinflation; low unemployment
D)   steep inflation; high unemployment
E)   deflation; high unemploymentF) A) and E)
G) A) and C)

Question 19

Deflation refers to

Accepted Answer

A)   a decrease in the rate of inflation.
B)   a falling price level.
C)   Both A and B are correct.
D)   None of the above is correct.E) B) and C)
F) A) and D)

Question 20

If the actual rate of inflation exceeds the expected rate of inflation, the actual real wage is greater than the expected real wage and unemployment falls.

Accepted Answer

A) True 
 B)False

Exam 28: Inflation, Unemployment, and Federal Reserve Policy

One problem with deflation is that it can raise the real value of debt.

Correct AnswerverifiedShow Answer

Figure 28-1 -Refer to Figure 28-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

Correct AnswerverifiedShow Answer

In the 1960s, many economists and policymakers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________, who argued that there is not trade-off between inflation and unemployment in the long run.

Correct AnswerverifiedShow Answer

Figure 28-9 -Refer to Figure 28-9. A(n) ________ would be depicted as a movement from A to D to C.

Correct AnswerverifiedShow Answer

A reduction in the rate of inflation is referred to as

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What does it mean to say that workers and firms have rational expectations?

Correct AnswerverifiedRational expectations means that workers...View AnswerShow Answer

Figure 28-9 -Refer to Figure 28-9. Fed Chairman Paul Volcker's response to the ________ of the late 1970s is depicted in the figure above as a movement from C to D to A.

Correct AnswerverifiedShow Answer

The price level in the economy between 2016 and 2017 rose from 100 to 110. Between 2017 and 2018, the price level rose from 110 to 121. How does the short-run Phillips curve predict the unemployment rate will change as a result?

Correct AnswerverifiedShow Answer

Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?

Correct AnswerverifiedShow Answer

In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.

Correct AnswerverifiedShow Answer

The natural rate of unemployment will not change following an increase in ________ unemployment.

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All of the following have enhanced the Fed's credibility in conducting monetary policy except

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If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

Correct AnswerverifiedShow Answer

According to real business cycle models

Correct AnswerverifiedShow Answer

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

Correct AnswerverifiedShow Answer

If the actual rate of inflation exceeds the expected rate of inflation, the actual real wage is greater than the expected real wage and unemployment falls.

Correct AnswerverifiedShow Answer

Deflation refers to

Correct AnswerverifiedShow Answer

If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?

Correct AnswerverifiedShow Answer

Workers at a local mining company are paid $25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate.

Correct AnswerverifiedIf actual inflation is 3%, a 3% increase...View AnswerShow Answer

If the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see?

Correct AnswerverifiedShow Answer

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Rational expectations means that workers...
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In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in and .

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If actual inflation is 3%, a 3% increase...
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Correct Answer
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