Question 1

Following an unexpected decline in aggregate demand, once production cutbacks start offsetting rising inventory levels:

Accepted Answer

Once production cutbacks occur to offset rising inventory levels, the economy will adjust, and over time, it will return to its natural rate of unemployment as prices and wages adjust in the long run.

Question 2

The adaptive expectations theory suggests that:

Accepted Answer

The adaptive expectations theory suggests that people form their expectations of future prices based on past prices. Therefore, the price level that people expect in the future is based on the behavior of prices in the past.

Question 3

When aggregate demand declines unexpectedly and wage contracts are fixed, then the average price level will:

Accepted Answer

When aggregate demand declines unexpectedly and wage contracts are fixed, firms are unable to reduce wages. As a result, they will reduce production and output, which will lead to laying off workers. This decrease in output will lead to a decrease in the average price level as well.

Question 4

The actual rate of inflation is equal to the expected rate of inflation along the:

Accepted Answer

The vertical Phillips curve shows that there is no tradeoff between inflation and unemployment in the long run, meaning that the actual rate of inflation will be equal to the expected rate of inflation regardless of the level of unemployment. Therefore, the actual rate of inflation is not determined by any of the other curves listed in the question.

Question 5

A look at macroeconomic data across countries reveals that when economies experience recessions, unemployment rates rise, but wages fall very little, if at all.Which of the following is most likely to support the above observation?

Accepted Answer

Long-term labor contracts make wage rates sticky downwards, meaning that wages do not adjust downward easily during recessions. This results in rising unemployment rates, but little to no change in wages. Option A is not specific to recessions and is a general statement about wage determination. Option B is not entirely correct, as the demand for labor can fall during recessions. Option C is incorrect, as labor markets typically do not exhibit perfectly competitive characteristics. Option D is also not accurate, as the labor supply curve does not become perfectly inelastic during recessions.

Question 6

If an increase in inflation is expected, which of the following events is the least likely to occur?

Accepted Answer

If an increase in inflation is expected and nominal wage rates remain constant, then real wage rates (the purchasing power of wages) will decrease. This could lead to a decrease in workers' reservation wages (the lowest wage they are willing to accept for a job), making it less likely for them to demand higher wages. Therefore, option E is the least likely scenario to occur.

Question 7

According to the rational expectations view:

Accepted Answer

According to the rational expectations view, people form their expectations about the future based on all available information including past and current information, and anticipated policies. Therefore, if a policy change is anticipated, it will already be factored into people's expectations, and the economy will adjust accordingly to its natural rate of unemployment.

Question 8

Suppose that a labor union negotiates an increase in wages of 4 percent for the coming year because annual inflation for the past five years has been 4 percent.The expectations formed by the union are:

Accepted Answer

The union's expectations are adaptive because they are based on past inflation rates, assuming that future inflation will be similar to past trends.

Question 9

According to the theory of adaptive expectations, if the inflation rate has been 4.2 percent for the last ten years, people will expect next year's inflation rate to be:

Accepted Answer

According to adaptive expectations theory, people base their expectations of future inflation on past inflation rates. If inflation has been consistently at 4.2 percent for the last ten years, people will expect next year's inflation rate to be 4.2 percent as well. This is because they have adapted to the trend of inflation being at 4.2 percent and will assume that it will continue in the future. Therefore, option A is the best choice.

Question 10

Assume that an unemployed person expects inflation to be 4.5 percent.In reality, inflation turns out to be 2.9 percent.If wage expectations lag behind actual price changes:

Accepted Answer

If wage expectations lag behind actual price changes, individuals may continue to demand wages that reflect their expectation of higher inflation. This would lead to an increase in reservation wages that are above the market-clearing wage. As a result, job offers above the reservation wage will decline, and the unemployment rate will rise. So, option C is correct.

Question 11

When workers expect more inflation than actually occurs:

Accepted Answer

When workers expect more inflation than actually occurs, actual inflation is lower than expected, leading to lower wage demands and thus lower unemployment, causing a movement down the short-run Phillips curve.

Question 12

If nominal wage rates are contractually determined and cannot change in the short run, then an unexpected increase in the inflation rate will:

Accepted Answer

An unexpected increase in inflation reduces the real wage (since nominal wages are fixed), leading to higher business profits and potentially lower unemployment as firms hire more due to lower labor costs.

Question 13

If workers realize that an increase in nominal wage rates does not necessarily constitute a rise in real wages, then we would expect:

Accepted Answer

The answer of If workers realize that an increase in...

Question 14

Following a decline in the inflation rate, once long-term wage contracts are renegotiated and all prices in the economy adjust to their new equilibrium:

Accepted Answer

Once all prices in the economy adjust to their new equilibrium after a decline in the inflation rate and long-term wage contracts are renegotiated, the economy will return to the vertical Phillips curve, indicating that there is no trade-off between inflation and unemployment in the long run. This is because in the long run, nominal wages and other input prices fully adjust to changes in the overall price level, leading to the return of the natural rate of unemployment.

Question 15

Suppose that an increase in aggregate demand causes an unplanned depletion in business inventories.Which of the following situations will result from this?

Accepted Answer

The answer of Suppose that an increase in aggregate demand...

Question 16

Suppose the inflation rate has risen 0.5 percent a year for the past three years.Using this experience an individual forecasts a 0.5 percent rise in the coming year's inflation rate.This is an example of:

Accepted Answer

This is an example of adaptive expectations, where an individual forms their expectation of future inflation based on past experience. This approach assumes that future inflation rates will be similar to past rates, regardless of changes in economic conditions or policies. The other options, such as rational expectations, which assumes individuals use all available information to form expectations, are not supported by the given scenario.

Question 17

According to the theory of rational expectations, expansionary fiscal policy that is anticipated will:

Accepted Answer

Rational expectations suggest that people will anticipate the effects of expansionary fiscal policy, leading to an immediate adjustment in wage expectations upward due to the anticipated higher price level.

Question 18

If the percentage increase in nominal wage rates is less than the percentage increase in the price level, then:

Accepted Answer

When nominal wages increase by less than the price level, real wages fall, potentially leading to lower unemployment as labor becomes cheaper.

Question 19

The observed unemployment rate is less than the natural rate of unemployment if:

Accepted Answer

When the inflation rate is higher than expected, it can lead to a temporary decrease in unemployment below the natural rate, as firms are willing to hire more due to lower real wages.

Question 20

When the reservation wage is adjusted to account for a higher inflation rate:

Accepted Answer

When the reservation wage is adjusted for higher inflation, it typically leads to higher wage demands, which can increase production costs and lead to higher inflation, causing the short-run Phillips curve to shift outward.

Quiz 23: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles