Question 1

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?

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

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 indicated that there was a negative relationship between unemployment and inflation. However, this relationship has since been questioned and the Phillips curve is no longer considered a reliable guide to macroeconomic policy.

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

In the short run, a decrease in aggregate demand would lead to a decrease in production and an increase in unemployment. It would also lead to lower prices and therefore a decrease in inflation.

Question 5

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 6

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 7

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.

Accepted Answer

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Question 8

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 commonly defined as the rate of unemployment that exists when an economy is producing at its potential GDP, i.e. when the economy is operating at full employment and there are no cyclical or demand-related unemployment.

Question 9

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 10

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

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Question 11

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 reduces the purchasing power of nominal wages and thus reduces the real wage. This can lead to an increase in unemployment as workers may be less willing to supply their labor at the lower real wage.

Question 12

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

Accepted Answer

When the economy is producing at its potential GDP, it means that it is operating at its full capacity and all available resources are being utilized. At this point, unemployment is at its natural rate, which is the lowest level of unemployment that an economy can sustain given its structure and institutions. This natural rate is not zero, as there will always be some level of frictional and structural unemployment present in any economy. Therefore, choice A is the correct answer.

Question 13

A decrease in aggregate demand will

Accepted Answer

A decrease in aggregate demand means that there is less overall demand for goods and services in the economy, which leads to a decrease in output and higher unemployment. This shift in the economy will move it to a lower point on the short-run Phillips curve. The short-run Phillips curve reflects the inverse relationship between unemployment and inflation, so a decrease in aggregate demand will lead to lower output and higher unemployment, but also lower inflation. Therefore, the curve will shift to the right.

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

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 16

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?

Accepted Answer

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Question 17

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 18

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 19

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

Robert Shiller's study found that a large majority of the public does not believe that increases in inflation will quickly lead to an increase in wages.

Question 20

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 three of the given options. By adjusting the monetary policy, the Fed can influence the inflation rate by increasing or decreasing interest rates, the unemployment rate by stimulating or slowing down economic growth, and the growth rate of real GDP in the economy by adjusting the money supply.

Quiz 28: Inflation, Unemployment, and Federal Reserve Policy

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?

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

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

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.

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

The ________ curves are both vertical.

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

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.

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.

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.

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

A decrease in aggregate demand will

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

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

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?

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

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.

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