Question 1

Suppose that last year the unemployment rate was 5 percent and the inflation rate was 2.5 percent.If the natural rate of unemployment is 5 percent, how do you expect inflation to change?

Accepted Answer

The answer of Suppose that last year the unemployment rate...

Question 2

According to ________, the economy is normally at potential GDP.

Accepted Answer

Real business cycle models posit that the economy is always at its potential GDP level, as prices and wages are flexible and adjust to clear markets.

Question 3

According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of anticipated changes in monetary policy.

Accepted Answer

According to the rational expectations school of thought, individuals form their expectations about future economic conditions based on all available information, including anticipated changes in monetary policy. As a result, if individuals anticipate that the central bank will adjust its policies to offset any short-term fluctuations in inflation, then the short-run Phillips curve will be vertical, indicating that there is no trade-off between inflation and unemployment in the short run.

Question 4

________ would be the source of a "real" business cycle.

Accepted Answer

Technology shocks can lead to changes in productivity and input costs, which can cause fluctuations in output and employment levels. Anticipated changes in monetary or fiscal policy may lead to adjustments in expectations, but they do not directly affect the real economy unless they impact real interest rates or government spending on goods and services. Unanticipated changes in monetary policy may have real effects, but they are not a consistent source of business cycles. Therefore, the best choice is A)Technology shocks.

Question 5

According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of unanticipated changes in monetary policy.

Accepted Answer

The answer of According to the "rational expectations" school of...

Question 6

Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called

Accepted Answer

Real business cycle models focus on factors other than changes in the money supply, such as technology shocks, to explain fluctuations in real GDP.

Question 7

Figure 13.10  Alt text for Figure 13.10: In figure 13.10, a graph shows the points along which a typical long-run Phillips curve runs.
Long description for Figure 13.10: The x-axis is labelled, unemployment rate percent, and the y-axis is labelled, inflation rate percent per year.3 points; A, B, and C are plotted such that A and B share equivalent y-axis values, and B and C share equivalent x-axis values.
-Refer to Figure 13.10.A typical long-run Phillips curve would have the appearance of a curve running through points

Accepted Answer

The answer of Figure 13.10  Alt text for Figure...

Question 8

During the 1960s, in face of moderate and stable inflation, people tended to form adaptive expectations of future inflation rates.

Accepted Answer

During the 1960s, inflation was moderate and stable, leading people to form adaptive expectations of future inflation rates. This is because people expected future inflation rates to be similar to current and past inflation rates.

Question 9

If rational workers and firms know that the Bank of Canada is following a contractionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

If the Bank of Canada is following a contractionary monetary policy, it means that they are reducing the money supply or increasing interest rates to curb inflation. Rational workers and firms understand that this policy will result in decreased demand for goods and services and subsequently lead to lower prices or deflation. Therefore, they will adjust wages downwards so that the real wage remains the same. This is because if they don't adjust wages, their labor cost will be higher than the market price, and they may lose their competitive advantage. Hence, we can conclude that option B is the correct choice as it indicates that workers will reduce their wages so that the real wage remains unchanged.

Question 10

Figure 13.7  Alt text for Figure 13.7: In figure 13.7, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.7: The x-axis is labelled, unemployment rate percent.The y-axis is labelled, inflation rate percent per year.A line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the end of the x-axis.A line labelled, long-run Philips Curve, is perpendicular to the x-axis, and begins at the x-axis value 5.5%.Long-run Philips curve intersects short-run Philips Curve, at point (5.5%, 10%)just past the midpoint of both lines.Point (7.5, 5)is plotted close to the right end of the short-run Philips Curve.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.7.Consider the Phillips curves depicted in the graph above.The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are not altered by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run.

Accepted Answer

If expectations of inflation are not altered, the short-run Phillips curve does not shift. Therefore, reducing inflation from 10% to 5% will move the economy along the existing Phillips curve, resulting in higher unemployment, likely at 7.5 percent.

Question 11

When individuals use ________ about an economic variable to make a decision, expectations are rational.

Accepted Answer

Rational expectations theory suggests that individuals make decisions based on all available information, including past and present economic data, news reports, government announcements, and other sources. Therefore, option C is the most appropriate choice as it implies that individuals consider all available information to make rational decisions regarding economic variables.

Question 12

With which of the following statements would a "real business cycle" theorist most closely agree?

Accepted Answer

Real business cycle theorists contend that fluctuations in economic activity arise primarily from real factors such as changes in technology, productivity, and labor supply, rather than from changes in monetary policy. Therefore, they would most closely agree with the statement that "Technological shocks to the economy explain deviations of real GDP from its potential level."

Question 13

If wages and prices adjust rapidly, we would expect expansionary monetary policy to be

Accepted Answer

Rapid adjustments in wages and prices suggest that the economy is operating near its potential output, meaning there is little slack in the labor market. In this situation, expansionary monetary policy is likely to have limited impact on reducing unemployment as there are relatively few unemployed workers available. Therefore, option C is correct, as it suggests that expansionary monetary policy is less likely to affect the unemployment rate in such an economy. Furthermore, rapid wage and price adjustments also suggest that the Phillips curve may be steeper, meaning that changes in aggregate demand are less likely to affect the inflation rate. Therefore, option D is also correct.

Question 14

Figure 13.9  Alt text for Figure 13.9: In figure 13.9, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.9: The x-axis is labelled, unemployment rate percent.The y-axis is labelled, inflation rate percent per year.A line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the end of the x-axis.A line labelled, long-run Philips Curve, is perpendicular to the x-axis, and begins from x-axis value 5.5%.Long-run Philips Curve intersects the short-run Philips Curve at point (5.5%, 10%)just pas the midpoint of both lines.Point (7.5, 5)is plotted close to the right end of the short-run Philips Curve.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.9.Consider the Phillips curves depicted in the graph above.The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If the assumptions of the rational expectations school hold true, and the Bank of Canada's announcement is credible, the rate of unemployment will be ________ in the short run.

Accepted Answer

If the rational expectations school holds true and the announcement is credible, people will adjust their expectations immediately, and unemployment will remain at the natural rate, which is 5.5 percent in this context.

Question 15

What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation?

Accepted Answer

When consumers and firms expect expansionary monetary policy to increase inflation, they may demand higher wages and prices, which will shift the short-run Phillips curve up. This means that the economy will face higher inflation and unemployment in a short-run period.

Question 16

The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.

Accepted Answer

The "rational expectations" school of economists acknowledges that there may be short-term effects of monetary policy on unemployment rates, but they argue that over the long run, these effects will not persist due to the adaptation of individuals and firms to the new conditions.

Question 17

If people assume that future rates of inflation will ________, they are said to have adaptive expectations.

Accepted Answer

Adaptive expectations refer to the idea that individuals base their expectations of future inflation rates on the pattern of inflation rates that have occurred in the past. Therefore, if people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have adaptive expectations.

Question 18

If the public holds rational expectations regarding changes in monetary policy, the short-run Phillips curve may be vertical.

Accepted Answer

If the public has rational expectations about changes in monetary policy, they will anticipate any shift in policy and adjust their behavior accordingly. This means that any perceived short-term benefits from an expansionary monetary policy will be offset by inflationary expectations, resulting in a vertical short-run Phillips curve.

Question 19

Real business cycle models argue that fluctuations in real GDP are caused by unanticipated changes in the money supply.

Accepted Answer

Real business cycle models argue that fluctuations in real GDP are caused by real shocks such as changes in technology, productivity, and labor supply, rather than monetary policy.

Question 20

Figure 13.8  Alt text for Figure 13.8: In figure 13.8, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.8: The x-axis is labelled, unemployment rate percent.The y-axis is labelled, inflation rate percent per year.A line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the end of the x-axis.A line labelled, long-run Philips Curve, is perpendicular to the x-axis, and begins fro the x-axis value 5.5%.Lon-run Philips Curve intersects short-run Philips Curve, at point (5.5%, 10%)just past the midpoints of both lines.Point (7.5, 5)is plotted close to the right end of the short-run Philips Curve.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.8.Consider the Phillips curves depicted in the graph above.The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run.

Accepted Answer

According to the graph, when the inflation rate decreases from 10 percent to 5 percent, the short-run Phillips curve shifts to the left, which means that in the short run, there will be a decrease in inflation but an increase in the rate of unemployment. The long-run Phillips curve intersects the short-run Phillips curve at a point slightly to the right of 5.5 percent unemployment and 10 percent inflation. Therefore, the rate of unemployment will be between 5.5 and 7.5 percent in the short run.

Quiz 13: Inflation, Unemployment, and Bank of Canada Policy