Question 1

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

Accepted Answer

This idea was known as the Phillips Curve and it suggested that as unemployment decreased, inflation would increase and vice versa. However, this trade-off became less clear in the 1970s and 80s with the emergence of stagflation.

Question 2

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?

Accepted Answer

Nominal wages will increase by the same percentage as the expected inflation rate, which is 5 percent in this case.

Question 3

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

Accepted Answer

The answer of In an effort to discover whether or...

Question 4

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

When there is a decrease in the rate of growth in aggregate demand, it leads to a decrease in production and a decrease in the demand for labor. This results in firms laying off workers, leading to an increase in the rate of unemployment. As the demand for goods and services goes down, firms lower their prices to try and increase their sales. This leads to a decrease in the rate of inflation.

Question 5

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

Accepted Answer

The natural rate of unemployment is the unemployment rate that exists when the economy is at potential GDP, also known as full employment. It includes frictional and structural unemployment but not cyclical unemployment, which is caused by fluctuating economic conditions. Deflation-based and zero-rate unemployment are not widely used terms in economics.

Question 6

If actual inflation is greater than expected inflation

Accepted Answer

If actual inflation is greater than expected inflation, it means that prices are rising faster than anticipated. This reduces the purchasing power of workers' wages, causing a decline in real wages.

Question 7

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, the actual real wage is lower than the expected real wage as the increase in nominal wages will not match the increase in the price level. This leads to a decrease in aggregate demand, causing unemployment to rise.

Question 8

If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent.

Accepted Answer

The Phillips curve represents a "structural relationship" when it suggests that the trade-off between unemployment and inflation is permanent, implying that the economy's underlying structure supports this ongoing trade-off.

Question 9

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 GDP. This means that all available resources (capital, labor, land, and entrepreneurship) are being utilized efficiently, which results in stable prices and low inflation. When the economy is producing below its potential, which can occur for various reasons such as a recession or a supply shock, the unemployment rate will be higher than the natural rate.

Question 10

A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods is called a ________ relationship.

Accepted Answer

A structural relationship is one that is based on the fundamental behavior of consumers and firms and is expected to remain relatively stable over long periods. This type of relationship is characterized by consistent patterns of behavior, such as the supply and demand for a particular product or service. This is in contrast to a cyclical relationship, which is subject to periodic fluctuations, or a dynamic relationship, which changes frequently and unpredictably. A frictional relationship, on the other hand, refers to the temporary barriers or obstacles that can arise in a market, such as information asymmetry or transaction costs.

Question 11

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 12

If actual inflation is greater than expected inflation,what is the relationship between the actual real wage and the expected real wage?

Accepted Answer

When inflation is greater than expected, the actual price level of goods and services is higher than what was expected. If nominal wages remain constant, this means that the purchasing power of the nominal wage has decreased. Therefore, the actual real wage (which takes inflation into account) will be lower than the expected real wage.

Question 13

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 found that a large majority of the public thinks that increases in inflation will not quickly lead to an increase in wages.

Question 14

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?

Accepted Answer

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

Question 15

All other factors held constant,increased growth in aggregate demand will

Accepted Answer

Increased growth in aggregate demand will lead to higher demand for goods and services, which in turn will lead to higher prices and inflation. This is known as demand-pull inflation. However, increased demand can also lead to increased output and employment in the short run, as firms increase production to meet the higher demand. This movement along the Phillips curve will result in lower unemployment rates. Therefore, all of the above options are correct.

Question 16

If changes in inflation are higher than expected

Accepted Answer

The answer of If changes in inflation are higher than...

Question 17

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.

Accepted Answer

The answer of Robert Shiller posed the following question to...

Question 18

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?

Accepted Answer

Since the price level has risen more than expected, Alejandro's nominal wage (the number of dollars he earns) will also have to rise in order to maintain the same real wage (the purchasing power of his salary). If his nominal wage does not rise as fast as the price level, then his real wage will fall.

Question 19

Shondra's real wage in 2016 is $18.50.If the price level is 106,what is Shondra's nominal wage?

Accepted Answer

To find the nominal wage, multiply the real wage by the price level (as a percentage): $18.50 * (106/100) = $19.61.

Question 20

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

Accepted Answer

An increase in the inflation rate may lead to an increase in employment in the short run if it is expected and if the nominal wages adjust accordingly. However, if the increase in inflation rate is unexpected, it may create a temporary increase in employment due to the lag in adjusting nominal wages, but in the long run, it will lead to a decrease in employment as real wages decrease and firms face higher costs, leading to a decrease in demand for labor.

Quiz 28: Inflation, unemployment, and Federal Reserve Policy