Deck 28: Inflation, Unemployment, and Federal Reserve Policy

Question 1

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true?

A) The economy is producing a level of GDP equal to potential GDP.
B) Aggregate demand must have decreased.
C) Equilibrium GDP at point C must be above potential GDP.
D) The Fed conducted contractionary policy to cause the move.
E) The Fed sold treasury bills to cause the move.

Answer 1

C

Question 2

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

A) buy treasury bills
B) sell treasury bills
C) raise the discount rate
D) decrease the money supply
E) raise taxes

Answer 2

A

Question 3

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?

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

Answer 3

B

Question 4

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following?

A) an increase in the unemployment rate to 3.4%
B) a decrease in the unemployment rate to 3.0%
C) an increase in the unemployment rate and a return to the original inflation rate
D) a return to the original inflation rate of 1.3%

Question 5

In the long run, the Phillips curve is a ________ at ________.

A) horizontal line; 0% inflation
B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply
C) vertical line; the natural rate of unemployment
D) vertical line; the expected rate of inflation

Question 6

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A. If the Federal Reserve engaged in contractionary monetary policy, where would the economy end up in the short run?

A) It would remain at point A.
B) point B
C) point C
D) point D
E) point E

Question 7

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point C in the long run?

A) Buy treasury bills.
B) Sell treasury bills.
C) Lower the discount rate.
D) Increase the money supply.
E) No policy by the Federal Reserve will move the economy to point C in the long run.

Question 8

Evidence shows that many people who delay searching for a job for a year or longer after they are laid off

A) find it more difficult to find new employment than if they had searched for a new job soon after they were laid off.
B) find it easier to find new employment than if they had searched for a new job soon after they were laid off.
C) find that they have little to no chance to find new employment after being unemployed for so long.
D) find that the extra unemployment benefits they receive during their extended period of unemployment more than make up for the difficulty in finding a job once they decide to re-enter the workforce.

Question 9

Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur?

A) Unemployment of university employees will fall.
B) Real wages for university employees will rise.
C) Inflation will be 5 percent the following year.
D) The decrease in inflation is expected.

Question 10

Between December 2015 and mid-2017, the Federal Open Market Committee raised its target for the federal funds rate four times, and indicated that future increases were planned. General Motors and Toll Brothers faced significant consequences in 2017 from these increases in the federal funds rate target., where higher interest rates were considered partly responsible for sales declines of new automobiles and houses. This decrease in demand would result in a(n) ________ in employment and a(n) ________ in prices for General Motors and Toll Brothers.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 11

The curve showing the short-run relationship between the unemployment rate and the inflation rate is called

A) the monetary policy curve.
B) the Phillips curve.
C) the Sargent curve.
D) the unemployment curve.

Question 12

What is a "structural" relationship?

A) a relationship that depends on the size of firm investments in capital such as buildings and other structures
B) a relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods
C) a relationship between any two variables that is temporary
D) any relationship that cannot be anticipated

Question 13

According to the short-run Phillips curve, which of the following would result in low rates of unemployment?

A) weak increases in aggregate supply
B) a lower inflation rate
C) weak increases in aggregate demand
D) a higher inflation rate

Question 14

What is the natural rate of unemployment?

A) the unemployment rate that exists when the economy is at potential GDP
B) the unemployment rate that exists when the economy is at a trough in a business cycle
C) an unemployment rate of 0%
D) any unemployment rate that is above the inflation rate

Question 15

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point B in the long run?

A) Buy treasury bills.
B) Sell treasury bills.
C) Raise the discount rate.
D) Decrease the money supply.
E) No policy by the Federal Reserve will move the economy to point B in the long run.

Question 16

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A. If the Federal Reserve engaged in expansionary monetary policy, where would the economy end up in the short run?

A) It would remain at point A.
B) point B
C) point C
D) point D
E) point E

Question 17

If the Phillips curve represents a "structural relationship," then

A) the trade-off between unemployment and inflation is permanent.
B) the trade-off between unemployment and inflation holds only for the short run.
C) the trade-off between unemployment and inflation holds in the long run, but not in the short run.
D) the Phillips curve will be vertical in the long run.

Question 18

According to the short-run Phillips curve, the unemployment rate and the inflation rate are

A) unrelated.
B) positively related.
C) negatively related.
D) unaffected by monetary policy.

Question 19

Which of the following best describes the negative slope of the short-run Phillips curve?

A) Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls.
B) Aggregate demand grows so quickly that the inflation rate rises as unemployment rises.
C) Long-run aggregate supply increases quickly enough that inflation falls as unemployment also falls.
D) Short-run aggregate supply increases at the same pace as aggregate demand increases so that inflation and unemployment do not change.

Question 20

Figure 28-1
Refer to Figure 28-1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point B, which of the following must be true?

A) The economy is producing a level of GDP equal to potential GDP.
B) Aggregate demand must have increased.
C) Equilibrium GDP at point B must be below potential GDP.
D) The Fed conducted expansionary policy to cause the move.
E) The Fed purchased treasury bills to cause the move.

Question 21

Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ________ slope of the short-run Phillips curve.

A) positive
B) negative
C) zero
D) infinite

Question 22

According to the short-run Phillips curve, if unemployment is 2.4% and inflation is 3.7%, a decrease in the inflation rate might result in which of the following?

A) an increase in the unemployment rate to 3.4%
B) a decrease in the unemployment rate to 3.0%
C) a return to the original inflation rate of 3.7%
D) Both B and C are correct answers.

Question 23

According to the short-run Phillips curve, which of the following would result in high rates of unemployment?

A) strong increases in aggregate supply
B) a lower inflation rate
C) strong increases in aggregate demand
D) a higher inflation rate

Question 24

According to the ________ Phillips curve, the unemployment rate and the inflation rate are negatively related.

A) long-run
B) short-run
C) long-run and short-run
D) rational expectations

Question 25

In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is

A) downward sloping.
B) horizontal.
C) vertical.
D) upward sloping.

Question 26

In the decade of the ________, A.W. Phillips plotted data for Great Britain which revealed a relationship between rates of changes in wages versus unemployment rates. Economists later discovered other "Phillips Curve" relationships between rates of inflation versus unemployment rates.

A) 1930s
B) 1940s
C) 1950s
D) 1960s

Question 27

Evidence shows that for many people, delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills, making it harder for them to find employment. This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment?

A) cyclical
B) frictional
C) seasonal
D) structural

Question 28

The curve showing the short-run relationship between the ________ and the ________ is called the Phillips curve.

A) nominal interest rate; real interest rate
B) unemployment rate; inflation rate
C) price level; real GDP
D) exchange rate; real interest rate

Question 29

General Motors and Toll Brothers faced consequences when the Federal Open Market Committee ________ between 2015 and 2017. This Fed action was considered partly responsible for decreasing demand for new automobiles and new houses in 2017.

A) raised the target for the federal funds rate
B) decreased the discount rate
C) lowered the required reserve rate
D) implemented a series of open market sales of Treasury bonds

Question 30

The price level in the economy between 2016 and 2017 rose from 100 to 105. Between 2017 and 2018, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?

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 would not change since there is no change in the rate of inflation.

Question 31

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?

A) 3 percent
B) more than 3 percent
C) less than 3 percent
D) depends on actual inflation for next year

Question 32

Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 6 percent over the next year, which of the following will occur?

A) Unemployment of university employees will rise.
B) Real wages for university employees will fall.
C) Inflation will be 5 percent the following year.
D) The increase in inflation is expected.

Question 33

Matt's real wage in 2018 is $26.80. If the price level is 104, what is Matt's nominal wage?

A) $30.80
B) $27.87
C) $26.80
D) $25.77

Question 34

The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.

A) unexpected
B) expected
C) perfectly predicted
D) ignored

Question 35

A higher inflation rate can lead to lower unemployment if ________ mistakenly expect the inflation rate to be lower than it turns out to be.

A) workers, but not employers
B) employers, but not workers
C) both workers and employers
D) neither workers nor employers

Question 36

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?

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.

Question 37

Employees at the hospital have negotiated a 3 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 5 percent over the next year, which of the following will occur?

A) Unemployment of hospital employees will rise.
B) Real wages for hospital employees will fall.
C) Inflation will be 3 percent the following year.
D) The increase in inflation is expected.

Question 38

If the long-run aggregate supply curve is vertical

A) the economy stays at the natural rate of inflation in the long run.
B) the short-run Phillips curve must be vertical.
C) unemployment and inflation are positively related in the long run.
D) the trade-off between unemployment and inflation cannot be permanent.

Question 39

If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________.

A) greater than; rise
B) greater than; fall
C) less than; rise
D) less than; fall

Question 40

If actual inflation is less than expected inflation, which of the following will be true?

A) Real wages will rise.
B) Real wages will fall.
C) The Phillips curve will be a vertical line.
D) The unemployment rate will fall.

Question 41

If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?

A) The actual real wage will be lower than the expected real wage.
B) The actual real wage will be higher than the expected real wage.
C) The actual real wage will be equal to the expected real wage.
D) The relationship between the actual real wage and the expected real wage cannot be predicted.

Question 42

If the economy is producing at potential GDP

A) unemployment is at its natural rate.
B) the Phillips curve must be positively sloped.
C) the short-run aggregate supply curve must be vertical.
D) inflation in the economy is at its natural rate.

Question 43

If workers and firms expect that inflation will be 5 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

A) 5 percent
B) more than 5 percent
C) less than 5 percent
D) depends on actual inflation for next year

Question 44

All other factors held constant, increased growth in aggregate demand will

A) increase inflation.
B) reduce unemployment.
C) move the economy to a higher point on the short-run Phillips curve.
D) All of the above are correct.

Question 45

If weak aggregate demand is pushing the economy into recession, which of the following must be true?

A) The economy is at an equilibrium that is on the long-run aggregate supply curve.
B) The economy is at an equilibrium that is on the long-run Phillips curve.
C) The economy is at an equilibrium that is not on the long-run Phillips curve.
D) Contractionary monetary policies will push the economy back to the long-run Phillips curve.

Question 46

If changes in inflation are higher than expected

A) the short-run Phillips curve will be positively sloped, but not vertical.
B) the short-run Phillips curve will be negatively sloped.
C) the short-run Phillips curve will be vertical.
D) the long-run Phillips curve will be negatively sloped.

Question 47

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.

A) Robert Lucas and Thomas Sargent
B) Finn Kydland and Edward Prescott
C) Paul Samuelson and James Tobin
D) Milton Friedman and Edmund Phelps

Question 48

Shondra's real wage in 2018 is $18.50. If the price level is 106, what is Shondra's nominal wage?

A) $19.61
B) $18.61
C) $18.50
D) $17.44

Question 49

If actual inflation is greater than expected inflation

A) real wages rise.
B) real wages fall.
C) the Phillips curve is a vertical line.
D) the unemployment rate rises.

Question 50

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?

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.

Question 51

The unemployment rate that exists when the economy is at potential GDP is called

A) the natural rate of unemployment.
B) cyclical unemployment.
C) deflation-based unemployment.
D) zero-rate unemployment.

Question 52

In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was

A) "My wages usually catch up to rising prices within a year."
B) "The price increase will create extra profit for my employer.... There will be no affect on my pay."
C) "My wages have always increased by more than the rate of inflation."
D) None of the above is correct.

Question 53

Growth in aggregate demand will

A) cause deflation.
B) increase unemployment.
C) move the economy to a higher point on the short-run Phillips curve.
D) cause the short-run Phillips curve to shift to the left.

Question 54

In the long run, the Phillips curve is a ________ at ________.

A) horizontal line; 0% inflation
B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply
C) vertical line; the natural rate of unemployment
D) None of the above is correct.

Question 55

The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________.

A) positively sloped; negatively sloped
B) vertical; negatively sloped
C) vertical; also vertical
D) positively sloped; positively sloped

Question 56

If the long-run aggregate supply curve is vertical

A) the economy stays at the natural rate of inflation in the long run.
B) the short-run Phillips curve must be vertical.
C) unemployment and inflation are positively related in the long run.
D) the trade-off between unemployment and inflation cannot be permanent.

Question 57

A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods is called a ________ relationship.

A) frictional
B) structural
C) cyclical
D) dynamic

Question 58

Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored.

A) 25
B) 42
C) 64
D) 81

Question 59

If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent.

A) structural
B) frictional
C) cyclical
D) dynamic

Question 60

Alejandro expects the price level to rise from 105 this year to 108 next year. If the price level rises to 110 next year instead of 108, which of the following will occur?

A) Alejandro's real wage remains unchanged.
B) Alejandro's real wage falls.
C) Alejandro's real wage rises.
D) Alejandro's real wage may rise or fall, depending on the unemployment rate.

Question 61

What action should the Fed take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation?

Question 62

If strong aggregate demand is pushing the economy beyond potential real GDP, which of the following must be true?

A) The economy is at an equilibrium that is on the long-run aggregate supply curve.
B) The economy is at an equilibrium that is on the long-run Phillips curve.
C) The economy is at an equilibrium that is not on the long-run Phillips curve.
D) Expansionary monetary policies will push the economy back to the long-run Phillips curve.

Question 63

In the 1960s, many economists and policymakers believed the trade-off between inflation and unemployment was permanent.

Question 64

Ceteris paribus, in the short run following a decrease in the rate of growth in aggregate demand, we would expect to see an increase in the rate of unemployment and a decrease in the rate of inflation.

Question 65

In the dynamic AD-AS model, when will an increase in aggregate demand not result in lower unemployment rates in the short run?

Question 66

The ________ curves are both vertical.

A) aggregate demand and short-run Phillips
B) long-run aggregate supply and short-run Phillips
C) long-run aggregate supply and long-run Phillips
D) short-run aggregate supply and short-run Phillips

Question 67

If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.

Question 68

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

Question 69

If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent? Illustrate your answer with a Phillips curve.

Question 70

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.

Question 71

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.

Question 72

If the economy is producing ________, unemployment is at its natural rate.

A) at potential GDP
B) above potential GDP
C) at an inflation rate of zero
D) at an unemployment rate of zero

Question 73

A decrease in aggregate demand will

A) cause inflation.
B) decrease unemployment.
C) move the economy to a lower point on the short-run Phillips curve.
D) cause the short-run Phillips curve to shift to the right.

Question 74

An increase in the inflation rate increases employment only if the increase in inflation is unexpected.

Question 75

Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived.

Question 76

If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?

Question 77

In the dynamic AD-AS model, when will a decrease in aggregate demand not result in a lower inflation rate in the short run?

Question 78

Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers.

Question 79

A study conducted by Robert Shiller, a Yale Economist, found that a large majority of the public thinks that increases in inflation will not quickly lead to an increase in wages.

Question 80

In the short run, the Federal Reserve can affect which of the following?

A) the inflation rate
B) the unemployment rate
C) the growth rate of real GDP in the economy
D) all of the above