Deck 17: Inflation, unemployment, and Federal Reserve Policy

Question 1

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

Answer 1

vertical line; the natural rate of unemployment

Question 2

Which of the following best explains 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.

Answer 2

Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls.

Question 3

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.

Answer 3

negatively related.

Question 4

CarMax benefitted when the Federal Reserve slashed the federal funds rate to near-zero levels in 2008.Lower interest rates increased demand for its used cars,which would allow Carmax to ________ employment and ________ prices.

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

Question 5

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 6

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 7

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.

Question 8

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 9

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 will move the economy to point B in the long run.

Question 10

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 11

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 12

Matt's real wage in 2012 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 13

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) a decrease in the demand for labor in the economy
D) a return to the original inflation rate of 1.3%

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

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 16

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 17

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

Question 18

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 19

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 20

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 21

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 22

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 23

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point C in the figure above.If workers adjust their expectations of inflation,which of the following will be true?

A) The short-run Phillips curve will shift to the right.
B) The short-run Phillips curve will shift to the left.
C) The economy will move from C to A.
D) Workers and firms expect inflation to be 1%.
E) The natural rate of unemployment is 6%.

Question 24

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point A in the figure above.Which of the following is true?

A) The short-run Phillips curve will shift to the right.
B) The short-run Phillips curve will shift to the left.
C) The long-run Phillips curve will shift to the left.
D) Actual inflation and expected inflation are the same.
E) The long-run Phillips curve will shift to the right.

Question 25

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

Question 26

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 27

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 28

The expansionary monetary and fiscal policies of the 1960s resulted in

A) high inflation rates and high rates of unemployment.
B) low inflation rates and low rates of unemployment.
C) low inflation rates and high rates of unemployment.
D) high inflation rates and low rates of unemployment.

Question 29

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point B in the figure above.Which of the following is true?

A) The expected rate of inflation is 3%.
B) The natural rate of unemployment is 3.8%.
C) The current unemployment rate is 5%.
D) The economy is producing at potential GDP.
E) Expected inflation and actual inflation are the same.

Question 30

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 31

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 32

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 33

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point A in the figure above.Which of the following is true?

A) The expected rate of inflation is 5.5%.
B) The current unemployment rate is equal to the natural rate of unemployment.
C) The current unemployment rate is 3.8%.
D) Actual inflation is 1%.
E) The economy will move from A to B.

Question 34

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

Question 35

When will an increase in aggregate demand not result in lower unemployment rates in the short run?

Question 36

The price level in the economy between 2009 and 2010 rose from 100 to 105.Between 2010 and 2011,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 37

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

Question 38

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 39

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 40

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 41

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 42

Where does the short-run Phillips curve intersect the long-run Phillips curve?

A) at the point where the rate of inflation and the unemployment rate are equal
B) at the natural rate of inflation
C) at the point where actual inflation is equal to expected inflation
D) There is no intersection between the short-run and long-run Phillips curves.

Question 43

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point B.If the Fed increases the money supply so that inflation increases,the economy will ________ in the short run,holding all else constant.

A) eventually move to point A
B) stay at point B
C) eventually move to point C
D) move to point A and then back to point B

Question 44

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 45

A decrease in expected inflation will

A) reduce real wages.
B) increase the natural rate of unemployment.
C) shift the long-run Phillips curve to the left.
D) shift the short-run Phillips curve to the left.

Question 46

What impact does monetary policy have on the long-run Phillips curve?

A) Monetary policy can only shift the long-run Phillips curve to the left.
B) Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is expansionary or contractionary.
C) Monetary policy can only shift the long-run Phillips curve to the right.
D) Monetary policy has no impact on the long-run Phillips curve.

Question 47

What can the Federal Reserve do to reduce the natural rate of unemployment?

A) nothing
B) follow expansionary monetary policy that will increase inflation
C) follow expansionary monetary policy that will reduce inflation
D) follow contractionary monetary policy that will increase inflation

Question 48

If workers and firms raise their inflation expectations,

A) unemployment will fall.
B) actual inflation will fall to match expected inflation.
C) the short-run Phillips curve will be vertical.
D) the short-run Phillips curve will shift upward.

Question 49

Figure 28-2

Refer to Figure 28-2.The nonaccelerating inflation rate of unemployment,or NAIRU,is associated with which point rate in the figure above?

A) A
B) B
C) C
D) all of the above

Question 50

Figure 28-2

Refer to Figure 28-2.At which point are inflation expectations equal to the actual inflation rate?

A) A
B) B
C) C
D) all of the above

Question 51

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point C.If the Fed decreases the money supply so that inflation falls,the economy will ________ in the long run,holding all else constant.

A) eventually move to point A
B) eventually move to point B
C) stay at point C
D) move to point A and then back to point B

Question 52

If expected inflation rises,the long-run Phillips curve will

A) shift to the right.
B) not be affected.
C) shift to the left.
D) become negatively sloped.

Question 53

What is the NAIRU?

A) the natural accelerating inflation rate of unemployment
B) the nonaccelerating inflation rate of unemployment
C) the nongovernmental agency of inflationary rate unions
D) the new accrual index of real unemployment

Question 54

An increase in the expected inflation rate will

A) shift the short-run Phillips curve to the right.
B) shift the short-run Phillips curve to the left.
C) reduce the inflation rate.
D) reduce the unemployment rate.

Question 55

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy,which of the following would you expect to see?

A) The Fed will follow deflationary monetary policies.
B) The Fed will follow inflationary monetary policies.
C) The rate of inflation will fall as Fed tries to reduce the unemployment rate.
D) The Fed will reduce the natural rate of unemployment.

Question 56

Figure 28-2

Refer to Figure 28-2.At which point is the unemployment rate equal to the natural rate of unemployment?

A) A
B) B
C) C
D) There is insufficient information on the graph to answer this question.

Question 57

The long-run Phillips curve is ________ than the short-run Phillips curve.

A) flatter
B) steeper
C) less stable
D) more volatile

Question 58

Which of the following would increase the natural rate of unemployment?

A) an increase in the number of younger, less skilled workers in the economy
B) a reduction in the generosity of unemployment insurance programs
C) restrictions on the ability of unions to negotiate wage changes with companies
D) an increase in government-sponsored programs that train unemployed workers so they can find new jobs quickly

Question 59

When unemployment is below its natural rate,the inflation rate will eventually

A) increase.
B) decrease.
C) move to its natural rate.
D) become equal to the natural rate of unemployment.

Question 60

Figure 28-2

Refer to Figure 28-2.Suppose the economy is at point A.The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A.Which of the following will occur?

A) Inflation will accelerate in the long run.
B) Inflationary expectations will decline.
C) Unemployment will rise above the natural rate.
D) Unemployment will accelerate in the long run.

Question 61

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 62

If workers and firms know that the Federal Reserve is following an expansionary monetary policy,workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________.

A) increase; increases
B) increase; remains unchanged
C) decrease; decreases
D) increase; decreases

Question 63

When inflation is very low,how do workers and firms adjust their expectations of inflation?

A) They rapidly adjust their expectations of inflation upward.
B) They rapidly adjust their expectations of inflation downward.
C) They tend to ignore inflation.
D) They are more aggressive in asking for wage and price increases.

Question 64

A decrease in the level of cyclical unemployment will shift the long-run Phillips curve.

Question 65

In the long run,the Federal Reserve can control which of the following?

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

Question 66

According to economists Robert Lucas and Thomas Sargent,when are the gains to accurately forecasting inflation highest?

A) when inflation is high and unstable
B) when inflation is low
C) when inflation is moderate but stable
D) when inflation is high and stable

Question 67

If inflationary expectations on the part of the public increase,the trade-off between inflation and unemployment becomes worse.

Question 68

If unemployment persists for a long period of time,the natural rate of unemployment rises.

Question 69

During which of the following time periods did inflation remain above 5 percent every year?

A) 1990 through 1999
B) 1973 through 1982
C) 1968 through 1971
D) 1958 through 1962

Question 70

Suppose a presidential candidate makes a statement in a debate whereby he promises that he would encourage the Fed to permanently lower the unemployment rate to 3%.His opponent claims that this type of policy idea is mired in the 1960s and would only cause inflation.Explain what the opponent means.

Question 71

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 72

If firms and workers have rational expectations,including knowledge of the policy being used by the Federal Reserve

A) expansionary monetary policy is especially effective.
B) expansionary monetary policy is ineffective.
C) expansionary monetary policy is effective in the short run, but not the long run.
D) expansionary monetary policy is effective in the short run and the long run.

Question 73

If firms and workers have rational expectations,including knowledge of the policy being used by the Federal Reserve,the short-run Phillips curve will be

A) negatively sloped.
B) positively sloped.
C) vertical.
D) flatter in the long run than it is in the short run.

Question 74

The short-run Phillips curve will shift if there is

A) an increase in the unemployment rate.
B) an increase in inflation that is unanticipated.
C) a decrease in inflation that is unanticipated.
D) a change in inflation expectations.

Question 75

If people assume that future rates of inflation will follow the pattern of inflation rates in the past,they are said to have

A) rational expectations.
B) adaptive expectations.
C) unstable expectations.
D) accommodative expectations.

Question 76

A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________.

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

Question 77

When individuals use all available information about an economic variable to make a decision,expectations are

A) underestimates of reality.
B) accurate.
C) rational.
D) overestimates of reality.

Question 78

What is the relationship between the short-run Phillips curve and the long-run Phillips curve?

Question 79

The natural rate of unemployment is fixed and unchanging.

Question 80

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.