Question 1

If labor union leaders are successful in demanding a wage increase, then their actions will cause:

Accepted Answer

When labor union leaders demand a wage increase, it means the cost of production for the firms will increase. This will cause a decrease in AS (Aggregate Supply) as firms will have to produce less output at higher costs.

Question 2

Suppose that the government collects $500 in taxes and borrows $1000 from the public. If the government prints $200 in new money to finance its budget deficit, how much is the government spending?

Accepted Answer

The government spending is the sum of taxes collected, money borrowed, and new money printed: $500 + $1000 + $200 = $1700.

Question 3

Recall Application 3, "Hyperinflation in Zimbabwe," to answer the following questions:
-An 8 million percent annual increase in the price level implies that if the price of a basket of goods in June 2007 was $100, then in June 2008, the price of the same basket of goods would be:

Accepted Answer

An 8 million percent increase means the price multiplies by 80,000 times (since 8 million percent is 80,000 times the original price). Therefore, $100 becomes $8 million.

Question 4

Inflation in the long run is positively correlated with:

Accepted Answer

In the long run, inflation is positively correlated with nominal wages and nominal interest rates. As prices rise, firms will eventually pass on their increased costs to consumers in the form of higher prices, leading to higher inflation. This could also lead to an increase in nominal wages as workers demand higher pay to keep up with the rising cost of living. Additionally, nominal interest rates may also increase as lenders demand higher returns to account for the inflation risk.

Question 5

When the Fed randomly increases the money supply at a lower rate than what is expected by the public,:

Accepted Answer

When the Fed increases the money supply at a lower rate than what is expected by the public, it will reduce the available money circulation in the economy, causing interest rates to go up.

Question 6

One of the main insights of monetarism is that:

Accepted Answer

Monetarism posits that inflation is primarily caused by an increase in the money supply. Therefore, sustained inflation is seen as a monetary phenomenon, rather than being driven by other factors such as supply shocks or changes in aggregate demand.

Question 7

The quantity equation is derived from:

Accepted Answer

The quantity equation, MV = PY, is derived from the definition of velocity, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real GDP. Velocity (V) is defined as the rate at which money circulates in the economy, linking the money supply to nominal GDP.

Question 8

A policy that reduces the natural rate of unemployment:

Accepted Answer

Reducing the natural rate of unemployment shifts the expectations Phillips curve to the left, indicating lower unemployment at each level of expected inflation.

Question 9

If firms have rational expectations and if they set prices and wages on this basis, then:

Accepted Answer

With rational expectations, firms will set prices and wages at levels that ensure equilibrium in the markets for goods and labor. It may not be possible for them to know the exact demand and supply curves they face, but they will adjust their prices and output based on their perceptions of market conditions. This will lead to a stable equilibrium in the long run.

Question 10

If the quantity equation holds, then a country operating under a gold standard will experience inflation:

Accepted Answer

A gold rush increases the supply of gold, which increases the money supply under a gold standard, leading to inflation.

Question 11

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions:
-According to the application, the Beveridge Curve depicts:

Accepted Answer

The Beveridge Curve illustrates the inverse relationship between the unemployment rate and the number of job vacancies, indicating that as job vacancies increase, unemployment tends to decrease, and vice versa.

Question 12

Recall Application 1, "Shifts in the Natural Rate of Unemployment" to answer the following questions:
-According to the application, William Dickens estimated that the natural rate of unemployment in 1970 was:

Accepted Answer

The answer of Recall Application 1, "Shifts in the Natural...

Question 13

The group of economists who emphasize the role that the money supply plays in determining nominal income and inflation are called:

Accepted Answer

Monetarists emphasize the importance of the money supply in determining nominal income and inflation. They follow the teachings of economists such as Milton Friedman, who famously stated, "Inflation is always and everywhere a monetary phenomenon."

Question 14

The velocity of money is calculated as the ratio of:

Accepted Answer

The velocity of money is calculated as the ratio of nominal GDP to the money supply, as it measures the number of times a unit of currency is used in transactions over a given period of time.

Question 15

If the quantity equation holds, then a country operating under a gold standard will experience _______ when its residents discover large gold deposits underground.

Accepted Answer

The quantity equation (M x V = P x Y) states that the money supply (M) multiplied by its velocity of circulation (V) equals the price level (P) multiplied by the level of real output (Y). Under a gold standard, the money supply is directly linked to the amount of gold reserves a country has. If residents discover large gold deposits underground, the country's gold reserves will increase and therefore its money supply will increase. With a constant velocity of circulation and level of real output, this increase in the money supply will lead to an increase in the price level, or inflation. Therefore, the correct answer is C - inflation.

Question 16

If prices increase by 4 percent and wages increase by 8 percent, the:

Accepted Answer

When prices increase by 4 percent and wages increase by 8 percent, the real wage has increased because it has grown faster than the rate of inflation. In other words, workers can now afford more goods and services with their increased wages, even though prices have also gone up.

Question 17

The expectations Phillips curve shows the inverse relationship between inflation and unemployment when:

Accepted Answer

The expectations Phillips curve takes into account expectations of inflation, meaning that individuals' expectations of future inflation can influence their behavior and therefore impact the actual level of inflation and the unemployment rate. Therefore, the inverse relationship between inflation and unemployment is most accurate when expectations of inflation are taken into account.

Question 18

Economists argue that central banks that are credible in their fight against inflation can more easily:

Accepted Answer

A central bank that is credible in its fight against inflation is perceived as more capable of keeping inflation in check. As a result, when it raises interest rates to fight inflation, people and businesses are more likely to believe that the rate hikes are necessary and will persist until inflation falls. This belief supports the central bank's efforts to reduce inflation without creating additional unemployment.

Question 19

If the government prints a $500 bill and it takes the government $2.50 to print the bill, then the seignorage that the government collects is:

Accepted Answer

Seignorage is the difference between the face value of the currency and the cost of producing it. In this case, the face value is $500 and the cost of production is $2.50. Therefore, the seignorage collected by the government is $497.50 (500-2.50 = 497.50).

Question 20

Which of the following will shift the natural rate of unemployment?

Accepted Answer

The natural rate of unemployment can be affected by various factors, including changes in the state of the economy (such as recessions or booms), changes in labor productivity (which can affect the demand for labor), and changes in the age structure of the labor force (such as an increase in the number of retirees or young people entering the workforce). Therefore, all of the above choices can shift the natural rate of unemployment.

Quiz 16: The Dynamics of Inflation and Unemployment