Question 1

Assume that individuals form expectations of inflation according to : n e = 8nt- 1. From 1970 on,the value of 8 for this equation:

Accepted Answer

According to the equation, the value of ne (expected inflation) depends on the value of nt (actual inflation) multiplied by 8 and then reduced by 1. As time progresses, the value of nt may fluctuate, but the coefficient of 8 remains constant. Therefore, over time, the value of 8 does not decrease or become negative. Also, it does not remain constant at zero or negative one. The only option that remains is that it increases over time and approaches 1.

Question 2

Hysteresis in the labour market refers to:

Accepted Answer

Hysteresis in the labour market refers to the idea that prolonged periods of high unemployment can lead to a permanent increase in the natural rate of unemployment. This means that an increase in actual unemployment can translate into an increase in the natural rate of unemployment, as workers become discouraged and lose skills, making it harder for them to find employment even when the economy improves.

Question 3

Data for which country were first used to illustrate the relationship between unemployment and inflation (i.e., the original Phillips curve)?

Accepted Answer

The original Phillips curve was based on data from the United Kingdom in the 1950s, where economist A.W. Phillips observed an inverse relationship between unemployment and wage inflation.

Question 4

A permanent increase in nominal money growth will, in the medium run, cause which of the following?

Accepted Answer

A permanent increase in nominal money growth will eventually lead to an increase in the inflation rate. This is because an increase in the supply of money leads to a decrease in the value of money, meaning that prices will rise over time. In the short run, there may be an increase in output as firms hire more workers and produce more goods due to the lower real interest rate resulting from the increase in nominal money growth, but in the medium run, this effect fades away and the economy settles at a higher level of prices with no long-term effects on output or employment. Therefore, answer choice D is the most accurate.

Question 5

Assume that expected inflation is based on u e = 8nt- 1. An increase in 8 will cause:

Accepted Answer

The answer of Assume that expected inflation is based on...

Question 6

As of 2012, when was the last year that Australia experienced deflation?

Accepted Answer

The last year that Australia experienced deflation was in 1933 during the Great Depression.

Question 7

One explanation for the higher natural rate of unemployment in Europe than in Australia is that:

Accepted Answer

The higher employment protection in Europe makes it more difficult for firms to hire and fire workers, which can lead to a higher natural rate of unemployment.

Question 8

Suppose the Phillips curve is represented by nt - nt- 1 = 20 - 2ut. Given this information, we know that the natural rate of unemployment in this economy is:

Accepted Answer

The natural rate of unemployment occurs when the change in inflation (nt - nt-1) is zero. Setting 0 = 20 - 2ut, we solve for ut: 2ut = 20, so ut = 10%.

Question 9

Suppose the Phillips curve is represented by nt - nt- 1 = 20 - 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%?

Accepted Answer

If the actual unemployment rate is 6%, then nt - nt-1 = 20 - 2(6) = 8. This positive value indicates that the rate of inflation will tend to increase.

Question 10

Which of the following statements will likely be correct when inflation has been persistent?

Accepted Answer

The answer of Which of the following statements will likely...

Question 11

Which of the following will tend to occur when a high proportion of a country's workers have indexed wages?

Accepted Answer

When wages are indexed, they automatically adjust with inflation, making the inflation rate more sensitive to changes in unemployment, leading to larger changes in inflation with unemployment rate changes.

Question 12

In which of the following decades did the Phillips curve break down for Australia?

Accepted Answer

The Phillips curve relationship between inflation and unemployment began to break down in the 1970s due to the oil crisis and other external shocks.

Question 13

t Assume that expected inflation is based on n e = 8nt- 1. If 8 = 1, we know that:

Accepted Answer

When expected inflation is based on the previous period's inflation (8 = 1), it implies that inflation expectations are adaptive. In such a scenario, low rates of unemployment can lead to steadily increasing rates of inflation, as predicted by the Phillips curve in the short run.

Question 14

Which of the following individuals first discovered the relationship between unemployment and inflation for the United States?

Accepted Answer

Samuelson and Solow were the first to empirically explore the relationship between unemployment and inflation in the United States, leading to the development of the Phillips Curve concept.

Question 15

Suppose policymakers underestimate the natural rate of unemployment. In a situation like this, policymakers might implement a policy that:

Accepted Answer

If policymakers underestimate the natural rate of unemployment, they might implement expansionary policies to reduce unemployment below its natural rate. This can lead to demand-pull inflation, where the demand for goods exceeds supply, causing prices to rise. Over time, this can result in steadily increasing inflation as the economy overheats.

Question 16

The "Lucas critique" is that:

Accepted Answer

The Lucas critique is a central argument within macroeconomics that policy changes affect expectations, which in turn changes the impact of the policy. In other words, past relationships between economic variables may break down when policy changes, as individuals in the economy might alter their behavior in response to new policy. This makes it challenging to predict the impact of policy changes and underscores the importance of understanding people's expectations when designing and evaluating policy.

Question 17

Which of the following assumptions best characterised the assumption about how individuals formed expectations of inflation by the early 1970s?

Accepted Answer

The assumption in the early 1970s was that individuals formed expectations of inflation based on the previous year's inflation rate, making choice B the best answer. Options A and C suggest an overemphasis on older inflation rates, while options D and E suggest a consistent increase or decrease in inflation rates, which is not necessarily true.

Question 18

As the proportion of labour contracts that index wages to prices declines, we would expect that:

Accepted Answer

With fewer wage contracts indexed to prices, wages become less automatically tied to inflation, reducing the direct impact of unemployment changes on inflation.

Question 19

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut . Which of the following will not cause an increase in the natural rate of unemployment?

Accepted Answer

A decrease in z (assuming z represents factors that reduce the natural rate of unemployment) would not cause an increase in the natural rate of unemployment. Instead, it would likely lead to a decrease or no change in the natural rate, contrary to the effects of decreasing a, implementing expansionary monetary or fiscal policies, or increasing m, all of which could increase the natural rate of unemployment by affecting inflation expectations or labor market dynamics.

Question 20

Analysis of the Australian experience in reducing the inflation rate in the late 1980s suggests which of the following?

Accepted Answer

The disinflation process in Australia during the late 1980s was consistent with the Phillips curve prediction, which suggests a trade-off between inflation and unemployment, indicating that reducing inflation often involves a recession or increased unemployment.

Quiz 8: The Phillips Curve, the Natural Rate of Unemployment and Inflation