Deck 18: Inflation, the Phillips Curve, and Central Bank Commitment

Question 1

If the central bank cannot commit,then

A) the inflation rate is higher than with commitment, but aggregate output is the same.
B) money is neutral in the short run.
C) the inflation rate is higher than with commitment, and aggregate output is lower.
D) the central bank can permanently increase the quantity of real output.

Answer 1

the inflation rate is higher than with commitment, but aggregate output is the same.

Question 2

In the United States,the observed Phillips curve is

A) unstable over time.
B) stable over time.
C) never discernible.
D) not a curve, but a straight line.

Answer 2

unstable over time.

Question 3

The original work on the application of the time inconsistency problem in macroeconomics is due to

A) Milton Friedman and Robert Lucas.
B) Michael Hutchinson and Carl Walsh.
C) Finn Kydland and Edward Prescott.
D) Robert Barro and Donald Gordon.

Answer 3

Finn Kydland and Edward Prescott.

Question 4

The slope of the Phillips curve in the United States was smallest during which period?

A) 1985-2012
B) 1970-1984
C) 1947-1969
D) 1776-1800

Question 5

The idea that economic agents do not make systematic errors because they use all information efficiently is called the

A) consistency hypothesis.
B) rational expectations hypothesis.
C) information efficiency hypothesis.
D) principle of maximizing behavior.

Question 6

The fact that private sector economic agents cannot be systematically fooled by economic policymakers is implied by

A) the Phillips curve.
B) time inconsistency.
C) commitment.
D) the rational expectations hypothesis.

Question 7

A predominant view among Federal Reserve officials is that

A) the Phillips curve is unimportant.
B) the Phillips curve helps us forecast inflation.
C) the Phillips curve helps us forecast the nominal interest rate.
D) the Phillips curve does not exist in the data.

Question 8

If the Phillips curve aids in forecasting inflation then

A) forecast errors from an alternative forecasting procedure should not be correlated with output fluctuations.
B) there should be no correlation between forecast errors from an alternative forecasting procedure and output fluctuations.
C) the Phillips curve is upward-sloping.
D) the Phillips curve is downward-sloping.

Question 9

In the Friedman-Lucas money surprise model

A) productivity growth causes real GDP to fluctuate.
B) a Phillips curve relationship does not arise.
C) workers are perfectly informed.
D) an increase in money growth increases aggregate output because workers interpret an increase in nominal wages as an increase in real wages.

Question 10

The Phillips curve shifts because

A) private behavior adapts to monetary policy.
B) expected inflation changes.
C) the central bank attempts to exploit the Phillips curve.
D) all of the above.

Question 11

If the central bank cannot commit,then

A) the leader of the central bank wants to quit.
B) the outcome is good for the macroeconomy.
C) the central bank cannot stop itself from exploiting the Phillips curve.
D) the Phillips curve is stable.

Question 12

In the Friedman-Lucas money surprise model

A) If actual inflation is higher than anticipated inflation, then output must be above its trend value.
B) If actual inflation is higher than anticipated inflation, then output must be below its trend value.
C) money is neutral.
D) monetary policy does not work.

Question 13

The Phillips curve shifts because

A) fiscal policy changes over time.
B) of total factor productivity shocks.
C) of economic development.
D) none of the above.

Question 14

A)W. Phillips' study of unemployment and inflation in the United Kingdom specifically looked at the empirical relationship between the unemployment rate and the

A) rate of change in prices.
B) rate of change in nominal wages.
C) rate of change in real wages.
D) level of nominal wages.

Question 15

In the Friedman-Lucas money surprise model,a surprise increase in money supply growth

A) has no effect on inflation.
B) increases inflation less than in proportion to the growth rate of the money supply.
C) increases inflation in an equal proportion to the growth rate of the money supply.
D) increases inflation more than in proportion to the growth rate of the money supply.

Question 16

In the United States,the Phillips curve is not stable in that

A) the intercept of the Phillips curve changes over time, but the slope does not change.
B) the intercept and slope of the observed Phillips curve change over time.
C) the slope of the Phillips curve changes, but its intercept does not change.
D) it changes from a curve to a circle.

Question 17

The rational expectations hypothesis means that

A) economic agents can predict the future.
B) economic agents do not make systematic errors.
C) everyone expects everyone else to act rationally.
D) economic agents reason with expectations.

Question 18

A Phillips curve is

A) the correlation between money growth and the inflation rate.
B) the negative correlation between the unemployment rate and the vacancy rate.
C) the positive observed correlation between the inflation rate and the nominal interest rate.
D) an observed positive correlation between the inflation rate and some measure of aggregate economic activity.

Question 19

Application of the time inconsistency problem to monetary policy suggests that,without some mechanism to ensure commitment,the

A) rate of inflation will be higher than it would be with commitment.
B) level of real output will be lower than it would be with commitment.
C) rate of inflation will be higher and the level of real output will be lower than they would be with commitment.
D) rate of inflation and the level of real output will be higher than they would be with commitment.

Question 20

Time inconsistency means

A) taking different decisions at different times despite facing the same situation.
B) making policy choices that violate the intertemporal budget constraint.
C) deciding to do something tomorrow, and then doing something different tomorrow.
D) adding a random factor to decisions.

Question 21

The time consistency problem implies that

A) the central bank should not commit.
B) central bank commitment is useful.
C) discretion is better than tying your hands.
D) there are problems we cannot solve.