Question 1

If employees and employers always accurately predict inflation, what is the shape of the Phillips curve?

Accepted Answer

If employees and employers always accurately predict inflation, then there would be no trade-off between inflation and unemployment, and the Phillips curve would be vertical in both the short and long run. This implies that changes in the level of aggregate demand would have no effect on the unemployment rate, and only affect the level of inflation.

Question 2

Based on the evidence, most economists believe that the self-correcting mechanism operates

Accepted Answer

Wages tend to be sticky and adjust slowly due to contracts, social norms, and other factors, making the self-correcting mechanism operate very slowly with wages.

Question 3

If the self-correcting mechanism operates quickly,

Accepted Answer

If the self-correcting mechanism operates quickly, it means that the economy will naturally adjust and move back towards its long-run equilibrium without the need for direct intervention. This makes it less necessary to use fiscal or monetary policy to close a recessionary gap.

Question 4

Policymakers who believe that the costs of inflation are very high will tend to favor which of the following during an inflationary gap?

Accepted Answer

Policymakers who believe that the costs of inflation are very high will tend to favor fiscal and monetary tightness during an inflationary gap. This means reducing government spending, increasing taxes, and reducing the money supply to reduce inflationary pressures.

Question 5

Many economists think that, in the long run, the economy tends to move toward

Accepted Answer

The natural or full-employment rate of unemployment is the rate at which the economy is producing at potential or full capacity. In the long run, economic forces such as technological progress, market competition, and changes in demographics tend to shift the economy toward this natural rate of unemployment. This is because as the economy grows, it creates more jobs and reduces unemployment, and as wages rise, it becomes more expensive for firms to hire more workers, which can lead to a reduction in employment. Therefore, option A is the correct choice.

Question 6

A vocal minority of economists, believers in the theory of rational expectations, insist that

Accepted Answer

Economists who believe in the theory of rational expectations argue that people's expectations of inflation are based on all available information, and thus any sudden changes in the level of aggregate demand caused by fiscal or monetary policy would only lead to temporary changes in the unemployment rate, with no long-term effects on inflation. As a result, they believe that the Phillips curve is vertical even in the short run, indicating that there is no trade-off between inflation and unemployment.

Question 7

If actual inflation differs from expected inflation, what is the slope of the Phillips curve?

Accepted Answer

In the short run, the Phillips curve is downward sloping, indicating an inverse relationship between inflation and unemployment. In the long run, it becomes vertical, reflecting the idea that there is no trade-off between inflation and unemployment when expectations adjust.

Question 8

What will tend to happen to wages if workers and employers foresee inflation?

Accepted Answer

If both workers and employers foresee inflation, they will likely negotiate an increase in nominal wages to keep up with the expected rise in prices. However, if the increase in nominal wages is enough to keep real wages constant, then they will not experience a decrease in purchasing power due to inflation. Therefore, nominal wages will increase by an amount that keeps real wages constant.

Question 9

If the short-run Phillips curve has a very flat slope, the

Accepted Answer

A flat short-run Phillips curve indicates that there is little trade-off between inflation and unemployment. This means that reducing unemployment will not lead to a significant increase in inflation, and therefore the inflation costs of reducing unemployment are relatively low.

Question 10

If workers always see inflation coming, and if they demand wage increases in advance so that inflation does not erode real wages, then the economy's aggregate supply curve on the AD-AS diagram will

Accepted Answer

If workers always see inflation coming and demand wage increases in advance, firms will also increase their prices in anticipation of higher labor costs. As a result, the short-run aggregate supply (SRAS) curve will shift upward, and the economy will experience higher inflation along with higher output. In the long run, however, wages and prices will adjust fully to changes in the money supply or other shocks, and the SRAS curve will return to its original position at potential GDP, making the aggregate supply curve a vertical line. Therefore, the economy's aggregate supply curve on the AD-AS diagram will be a vertical line corresponding to potential GDP.

Question 11

Rational expectations are forecasts

Accepted Answer

Rational expectations are based on the available information and knowledge of economic principles, but they may not always be correct as the future is uncertain. Rational expectations are formed by individuals and firms when they make decisions about spending, savings, and investment, and these decisions are based on their anticipations about future economic conditions. Therefore, rational expectations are the best that can be made given the available data, but they are not always accurate.

Question 12

If workers expect inflation, and negotiate wage increases that exactly match price increases, the result is a

Accepted Answer

If workers negotiate wage increases that exactly match price increases, it means that the costs of production will not change and the aggregate supply curve will be vertical at the level of potential GDP. This is because firms will not be incentivized to produce more output at a higher price level, as their costs are increasing at the same rate as their revenue. Therefore, the aggregate supply curve will be independent of the price level and vertical at the level of potential GDP.

Question 13

If workers and firms forecast inflation accurately,

Accepted Answer

When workers and firms accurately forecast inflation, they adjust their expectations and actions accordingly. This means that the real wage remains stable as nominal wages adjust to the inflation rate, ensuring that workers do not lose purchasing power and firms do not gain extra profit margins from the inflation. Consequently, the aggregate supply curve reflects an economy in long-term equilibrium, where it is vertical, indicating that output is at its natural rate and is not influenced by the price level.

Question 14

If inflationary expectations are quite sluggish (that is, they do not adapt quickly), then the short-run Phillips curve will

Accepted Answer

When inflationary expectations are sluggish, the short-run Phillips curve slopes downward, indicating an inverse relationship between inflation and unemployment.

Question 15

If the short-run Phillips curve has a very steep slope, the

Accepted Answer

A steep slope of the short-run Phillips curve indicates that there is a high inflation cost of reducing unemployment. This means that in the short-run, reducing unemployment through expansionary policies like increasing aggregate demand will lead to a significant increase in inflation. Therefore, policymakers need to consider the trade-off between unemployment and inflation carefully.

Question 16

If workers expect inflation, and tend to overestimate actual inflation when they negotiate wage increases, the result will be a continuing

Accepted Answer

The answer of If workers expect inflation, and tend to...

Question 17

If workers demand wage compensation in advance of inflation, the economy's aggregate supply curve will

Accepted Answer

If workers demand wage compensation in advance of inflation, it implies that wages are flexible and adjust to expected inflation. This leads to a vertical aggregate supply curve in the long run, as output is determined by factors other than the price level.

Question 18

Many economists think that, in the long run, the Phillips curve is

Accepted Answer

Many economists believe that in the long run, the Phillips curve is a vertical line, indicating that there is no trade-off between inflation and unemployment in the long run. This is because the long-run Phillips curve is determined by structural factors such as the natural rate of unemployment, and changes in the money supply only lead to changes in the price level, not in employment or output.

Question 19

If workers underestimate inflation, the aggregate supply curve will tend to be

Accepted Answer

If workers underestimate inflation, they will expect lower prices for their goods and services. As a result, they will supply more to the market than what is demanded, leading to an excess supply. To sell their excess supply, workers will lower their prices, and the overall price level will decrease. This will shift the short-run aggregate supply curve to the right, causing it to be upward sloping.

Question 20

If actual inflation differs from expected inflation, what is the slope of the aggregate supply curve?

Accepted Answer

In the short run, the aggregate supply curve has a positive slope, meaning that when actual inflation is greater than expected inflation, there will be an increase in output and vice versa. However, in the long run, the slope of the aggregate supply curve becomes vertical, meaning that the level of output is determined by the factors of production and not affected by changes in price levels. Therefore, in the long run, actual inflation will not affect output, resulting in a vertical slope.

Quiz 33: The Trade-Off Between Inflation and Unemployment