Question 1

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.

Accepted Answer

An increase in expected inflation (choice B) would not have any effect on unemployment, as workers and firms would already have adjusted their expectations and actions accordingly. Similarly, perfectly predicted inflation (choice C) would also have no effect on unemployment, as there would be no surprises to cause any changes in behavior. Ignored inflation (choice D) would be unlikely, as inflation affects prices and wages, which people tend to notice and react to. Therefore, the only choice that makes sense is unexpected inflation (choice A), as this would cause workers and firms to adjust their behavior in response to the surprise, which could lead to changes in unemployment.

Question 2

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?

Accepted Answer

Nominal wages will increase by the expected rate of inflation, which in this case is 3 percent. This means that workers and firms are anticipating that the overall price level will increase by 3 percent, so nominal wages need to increase by the same amount to maintain their purchasing power.

Question 3

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?

Accepted Answer

If workers adjust their expectations of inflation, the short-run Phillips curve will shift to the left, meaning that there will be a lower level of inflation for any given level of unemployment. This is because workers will demand lower nominal wage increases, reducing firms' costs and allowing them to hire more workers at lower wages, ultimately reducing unemployment. Therefore, the economy would move from point C to the left along the Phillips curve towards point B. None of the other options necessarily follows from a change in expectations of inflation.

Question 4

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?

Accepted Answer

The answer of Figure 28-2
 
-Refer to Figure 28-2.Suppose the...

Question 5

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

Accepted Answer

This statement is false. An increase in inflation can lead to an increase in employment when it is expected and accompanied by a corresponding increase in demand and economic growth. However, unexpected inflation can lead to short-term increases in employment due to confusion in the labor market, but this effect is temporary and can lead to long-term negative consequences.

Question 6

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

Accepted Answer

If actual inflation is less than expected inflation, prices will rise less than expected. This means that real wages (wages adjusted for inflation) will be higher than expected. As a result, firms will not hire as many workers, and unemployment will rise. Thus, actual real wages will be greater than expected real wages and unemployment will rise.

Question 7

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.

Accepted Answer

In the short run, a decrease in aggregate demand would lead to a decrease in output and an increase in unemployment. It would also lead to a decrease in the rate of inflation, as there would be less pressure on prices due to a decrease in demand.

Question 8

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

Accepted Answer

The expansionary monetary and fiscal policies of the 1960s aimed to stimulate economic growth through increased government spending and lower interest rates. However, this also increased the money supply and led to higher inflation rates. At the same time, low interest rates encouraged borrowing and investment, leading to low rates of unemployment. Therefore, the best answer is D, high inflation rates and low rates of unemployment.

Question 9

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?

Accepted Answer

The answer of Figure 28-2
 
-Refer to Figure 28-2.Suppose the...

Question 10

If the long-run aggregate supply curve is vertical,

Accepted Answer

The vertical long-run aggregate supply curve indicates that the economy's output is determined by factors other than the price level, such as technology and resources. This implies that in the long run, attempts to reduce unemployment below its natural rate through monetary or fiscal policy will only lead to higher inflation, not a permanent decrease in unemployment. Therefore, there cannot be a permanent trade-off between unemployment and inflation.

Question 11

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.

Accepted Answer

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

Question 12

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.

Accepted Answer

The answer of If the rate of inflation in the...

Question 13

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?

Accepted Answer

Point A is where the short-run aggregate supply curve intersects with the aggregate demand curve. At this point, the unemployment rate is equal to the natural rate of unemployment (which is approximately 4%). There is no information given about the expected rate of inflation or the actual inflation rate, and it is not stated whether the economy will move from A to B. Therefore, choices A, C, D, and E are incorrect.

Question 14

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

Accepted Answer

The answer of Does the short-run Phillips curve have a...

Question 15

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

Accepted Answer

The answer of When will an increase in aggregate demand...

Question 16

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?

Accepted Answer

The answer of The price level in the economy between...

Question 17

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

Accepted Answer

The natural rate of unemployment is sometimes also referred to as the full employment rate, and it exists when the economy is producing at its potential GDP level. This means that all available resources are being used efficiently, and any further increase in output would require an increase in the quantity or quality of these resources.

Question 18

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.

Accepted Answer

The answer of Workers at a local mining company are...

Question 19

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?

Accepted Answer

The answer of If workers accurately predict the rate of...

Question 20

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

Accepted Answer

Both workers and employers may mistakenly expect the inflation rate to be lower than it turns out to be, leading to lower unemployment. This is because when inflation is higher than anticipated, workers may be willing to accept lower real wages, which make them more attractive to employers. In turn, employers may hire more workers to take advantage of the lower real wages, leading to a decrease in the unemployment rate.

Quiz 17: Inflation, unemployment, and Federal Reserve Policy