Question 1

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

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Question 2

If strong aggregate demand is pushing the economy beyond potential real GDP,which of the following must be true?

Accepted Answer

When strong aggregate demand pushes the economy beyond its potential real GDP, it indicates that the economy is operating at a point above the long-run potential output, leading to inflationary pressures. This situation does not align with the long-run Phillips curve, which represents the relationship between unemployment and inflation when the economy is at its natural rate of unemployment (or potential output). Therefore, the economy is not on the long-run Phillips curve in this scenario.

Question 3

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.

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Question 4

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?

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Question 5

If the economy is producing ________,unemployment is at its natural rate.

Accepted Answer

When the economy is producing at potential GDP, it means that it is producing at its maximum sustainable level, which includes the natural rate of unemployment. The natural rate of unemployment is the rate of unemployment that exists when the economy is producing at its potential level and is not in a recession. Therefore, if the economy is producing at potential GDP, unemployment is at its natural rate.

Question 6

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?

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Question 7

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 the rate of unemployment that exists when the economy is producing at its potential output. This means that all available resources are being utilized efficiently and there is no cyclical unemployment.

Question 8

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.

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Question 9

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.

Accepted Answer

If the actual rate of inflation exceeds the expected rate of inflation, it means prices are rising faster than people anticipated. This reduces the purchasing power of money and causes the actual real wage to be lower than the expected real wage. In turn, this can lead to an increase in unemployment as firms may reduce their workforce or cut back on hiring if they face higher wage costs.

Question 10

The ________ curves are both vertical.

Accepted Answer

The long-run aggregate supply curve is vertical because it represents a time period in which output is determined by the factors of production and technology, not by the price level. The long-run Phillips curve is also vertical, reflecting the idea that in the long run, there is no trade-off between inflation and unemployment; the economy operates at the natural rate of unemployment regardless of inflation.

Question 11

In the dynamic AD-AS model,when will a decrease in aggregate demand not result in a lower inflation rate in the short run?

Accepted Answer

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Question 12

A decrease in aggregate demand will

Accepted Answer

A decrease in aggregate demand will lead to lower output and higher unemployment in the short run, which means the economy moves to a lower point on the short-run Phillips curve. This is because firms will produce less and lay off workers, which reduces the pressure on wages and prices in the short run. However, in the long run, the Phillips curve will shift back to its original position, meaning that the decrease in aggregate demand will not cause inflation or a permanent reduction in unemployment.

Question 13

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 leads to a decrease in output and a higher unemployment rate. This is known as the demand-pull inflation. However, as output decreases, there is less pressure on prices and inflation may decrease as well.

Question 14

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

Accepted Answer

This is known as the "surprise inflation" effect, where an unexpected increase in inflation can lead to an increase in employment due to the fact that workers may not immediately demand higher wages, leading to lower unemployment in the short run. However, if inflation is expected, workers will demand higher wages and firms will reduce employment, leading to higher unemployment in the long run.

Question 15

In the dynamic AD-AS model,when will an increase in aggregate demand not result in lower unemployment rates in the short run?

Accepted Answer

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Question 16

In the short run,the Federal Reserve can affect which of the following?

Accepted Answer

In the short run, the Federal Reserve can affect all of the above factors. By adjusting monetary policy, the Fed can influence inflation rates, unemployment levels, and the growth rate of real GDP in the economy.

Question 17

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.

Accepted Answer

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Question 18

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

Accepted Answer

This belief was known as the Phillips Curve, which suggested that there was an inverse relationship between inflation and unemployment. As unemployment decreased, inflation would increase, and vice versa. However, this relationship broke down in the 1970s with the emergence of stagflation, where both inflation and unemployment were high.

Question 19

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

Accepted Answer

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Question 20

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

According to the statement, the study conducted by Robert Shiller found that a large majority of the public believes that inflation will not quickly lead to an increase in wages. Therefore, the statement is true and the answer is A.

Quiz 17: Inflation, Unemployment, and Federal Reserve Policy