Deck 28: Inflation, unemployment, and Federal Reserve Policy

Question 1

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

Answer 1

a higher inflation rate

Question 2

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 2

negatively related.

Question 3

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

Answer 3

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

Question 4

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 5

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 6

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 7

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 8

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 9

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

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

Question 10

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 11

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 12

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 13

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

Question 14

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

Question 16

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 17

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 18

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 19

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 20

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.

Question 21

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 22

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 23

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 24

The price level in the economy between 2014 and 2015 rose from 100 to 105.Between 2015 and 2016,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 25

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 26

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 27

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 28

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 29

Matt's real wage in 2014 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 30

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 31

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 32

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 33

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 34

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 35

Goodyear benefitted when the Federal Reserve ________ in 2008.This Fed action would help increase demand for its tires,which allowed Goodyear to increase employment and increase prices.

A)drove down interest rates
B)increased the discount rate
C)lowered the required reserve rate
D)implemented a series of open market sales of Treasury bonds

Question 36

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 decrease in the demand for labor in the economy
D)Both A and C are correct answers.

Question 37

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 38

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 39

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 40

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 41

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

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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

Question 50

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 51

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 52

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 53

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 54

The price level in the economy between 2014 and 2015 rose from 100 to 110.Between 2015 and 2016,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 55

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 56

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 57

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 58

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 59

Shondra's real wage in 2016 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 60

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

Question 61

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 62

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 63

Figure 28-2

-Refer to Figure 28-2.Suppose the Fed used contractionary policy to push short-run equilibrium to point C.If the short-run equilibrium remained at point C long enough

A)the short-run Phillips curve would shift up.
B)the short-run Phillips curve would shift down.
C)the economy would move back to point A.
D)the economy would stay at point C in the long run.

Question 64

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 65

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 66

Figure 28-2

-Refer to Figure 28-2.Suppose the Fed used expansionary policy to push short-run equilibrium to point B.If the short-run equilibrium remained at point B long enough

A)the short-run Phillips curve would shift up.
B)the short-run Phillips curve would shift down.
C)the economy would move back to point A.
D)the economy would stay at point B in the long run.

Question 67

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 68

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 69

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

Question 70

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 71

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 72

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 73

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 74

When will a decrease in aggregate demand not result in a lower inflation rate in the short run?

Question 75

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 76

A decrease 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)increase the inflation rate.
D)increase the unemployment rate.

Question 77

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

Question 78

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 79

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 80

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