Question 1

Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _____, it can be argued that _____ is/are better off.

Accepted Answer

If the actual inflation rate is below 3%, Adrianna is better off because the real interest rate (nominal interest rate minus inflation rate) she earns on the bonds will be higher than expected, increasing her purchasing power.

Question 2

Use the following to answer questions: 
-(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The NAIRU is _____%.

Accepted Answer

The NAIRU (Non-Accelerating Inflation Rate of Unemployment) is the level of unemployment at which inflation does not change. It is often depicted on the Phillips Curve, which shows the inverse relationship between inflation and unemployment. Without seeing the specific figure, the correct answer cannot be determined directly from the question. However, if the question implies that the NAIRU is 5%, then option B would be the correct choice based on the information given.

Question 3

The short-run aggregate supply curve is positively sloped because wages and prices are not all completely flexible.

Accepted Answer

In the short run, wages and some prices are typically sticky or inflexible, leading to a positive slope of the short-run aggregate supply curve. As input prices increase, firms are willing to produce more in the short run, but eventually, as wages and prices adjust more fully, they will reach their long-run equilibrium values and the aggregate supply curve will become vertical.

Question 4

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is _____, it can be argued that _____ is/are worse off.

Accepted Answer

If the actual inflation rate is below 3%, the real interest rate (nominal interest rate minus inflation rate) is higher than expected, benefiting Tony and making the bank worse off.

Question 5

The classical model of the price level is more accurate during low inflation than high inflation.

Accepted Answer

The classical model of the price level, which posits a direct relationship between the money supply and the price level, assumes prices are flexible and markets clear quickly. It tends to be more accurate during periods of high inflation, where changes in the money supply have more immediate and noticeable effects on prices. During low inflation, other factors such as demand, productivity, and technological changes can have a more significant impact on the price level, making the classical model less accurate.

Question 6

In a liquidity trap:

Accepted Answer

In a liquidity trap, the nominal interest rate is already at or near zero, so further expansionary monetary policy is not effective. This is because the nominal interest rate cannot be reduced further, even though there is excess supply of money in the economy. Therefore, choice C is the correct answer.

Question 7

When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would:

Accepted Answer

"Japanification" refers to Japan's prolonged period of low economic growth and low inflation, with a risk of deflationary pressures. Therefore, Fed officials worrying about the possibility of "Japanification" in the United States would imply concerns about the U.S. economy falling into a deflationary trap like Japan.

Question 8

Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in price level.

Accepted Answer

Lowering income taxes increases consumers' disposable income, leading to higher spending and demand in the economy. In the long run, this does not affect the natural rate of unemployment, which is determined by factors like market structure and policies, not by cyclical factors. However, the increased demand can lead to higher prices, thus increasing the price level.

Question 9

To avoid falling into a liquidity trap, most central banks:

Accepted Answer

Seeking a positive but small inflation rate rather than zero inflation allows central banks to have some flexibility to adjust interest rates and stimulate demand in the event of a liquidity trap. If inflation is already at zero or close to zero, there is little room for further interest rate cuts to stimulate demand. Additionally, a small level of inflation can also help to prevent deflation, which can exacerbate a liquidity trap.

Question 10

The liquidity trap is NOT associated with:

Accepted Answer

The liquidity trap is primarily associated with a situation where monetary policy becomes ineffective due to nominal interest rates falling to zero and a large reduction in the demand for loanable funds, leading to a situation where additional money supply injections by the central bank do not result in a corresponding increase in aggregate demand. Fiscal policy, on the other hand, may still be effective in stimulating aggregate demand in a liquidity trap by increasing government spending or cutting taxes. Therefore, option D is not associated with the liquidity trap.

Question 11

The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%.

Accepted Answer

The statement is true. The late 1970s saw a period of high inflation in the United States, with prices increasing at an annual rate of 13%.

Question 12

A liquidity trap results from:

Accepted Answer

A liquidity trap occurs when nominal interest rates are at or near zero, making it impossible to stimulate the economy through monetary policy. This occurs because lowering interest rates further is ineffective in encouraging borrowing and investment, as individuals and businesses are already not interested in borrowing at low interest rates. Therefore, the best answer is D, the zero bound of the nominal interest rate. Options A, B, and C are not related to liquidity traps.

Question 13

Liquidity traps are most likely to occur when the:

Accepted Answer

Liquidity traps typically occur when the public expects deflation, as people will hold onto their cash in anticipation of falling prices. This can lead to a situation where interest rates are at or near zero, yet monetary policy remains ineffective in stimulating economic growth.

Question 14

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₁ is based on an expected inflation rate of:

Accepted Answer

The answer of Use the following to answer questions: 
-(Figure:...

Question 15

An inflation tax is the effect on the public of a reduction in the value of money caused by inflation.

Accepted Answer

An inflation tax is the indirect tax paid by holders of cash and fixed-income assets due to a decrease in the purchasing power of their money caused by inflation.

Question 16

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₂ is based on an expected inflation rate of:

Accepted Answer

The point of intersection between the short-run Phillips curve and the vertical axis (inflation rate of 0%) is at point B0, indicating a natural rate of unemployment. Therefore, the expected inflation rate must be 2% (the distance between point B0 and point B2) for there to be a tradeoff between inflation and unemployment in the short run.

Question 17

Use the following to answer questions: 
-(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The natural rate of unemployment is _____%.

Accepted Answer

The natural rate of unemployment is the rate at which the short-run Phillips curve intersects the vertical long-run Phillips curve, typically representing the economy's equilibrium level of unemployment where inflation is stable. Without seeing the figure, the correct answer cannot be determined directly from the question. However, historically and theoretically, a natural rate of unemployment around 5% is often considered typical for many economies, making option B a plausible choice based on common economic principles.

Question 18

In the classical model of the price level, there is no distinction between the short run and the long run.

Accepted Answer

In the classical model, there is only one long-run equilibrium and no short-run adjustment process.

Question 19

In June 2008 Zimbabwe had the world's highest unemployment rate.

Accepted Answer

The answer of In June 2008 Zimbabwe had the world's...

Question 20

If there is too much deflation:

Accepted Answer

Deflation can lead to a situation where nominal interest rates are at or near zero, limiting the central bank's ability to stimulate the economy through monetary policy.

Quiz 16: Inflation, Disinflation, and Deflation

Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _, it can be argued that _ is/are better off.

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The NAIRU is _____%.

The short-run aggregate supply curve is positively sloped because wages and prices are not all completely flexible.

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is _, it can be argued that _ is/are worse off.

The classical model of the price level is more accurate during low inflation than high inflation.

In a liquidity trap:

When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would:

Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _ in the natural rate of unemployment and _ in price level.

To avoid falling into a liquidity trap, most central banks:

The liquidity trap is NOT associated with:

The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%.

A liquidity trap results from:

Liquidity traps are most likely to occur when the:

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₁ is based on an expected inflation rate of:

An inflation tax is the effect on the public of a reduction in the value of money caused by inflation.

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₂ is based on an expected inflation rate of:

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The natural rate of unemployment is _____%.

In the classical model of the price level, there is no distinction between the short run and the long run.

In June 2008 Zimbabwe had the world's highest unemployment rate.

If there is too much deflation:

Quiz 16: Inflation, Disinflation, and Deflation

Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _____, it can be argued that _____ is/are better off.

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The NAIRU is _____%.

The short-run aggregate supply curve is positively sloped because wages and prices are not all completely flexible.

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is _____, it can be argued that _____ is/are worse off.

The classical model of the price level is more accurate during low inflation than high inflation.

In a liquidity trap:

When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would:

Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in price level.

To avoid falling into a liquidity trap, most central banks:

The liquidity trap is NOT associated with:

The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%.

A liquidity trap results from:

Liquidity traps are most likely to occur when the:

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC1 is based on an expected inflation rate of:

An inflation tax is the effect on the public of a reduction in the value of money caused by inflation.

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC2 is based on an expected inflation rate of:

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. The natural rate of unemployment is _____%.

In the classical model of the price level, there is no distinction between the short run and the long run.

In June 2008 Zimbabwe had the world's highest unemployment rate.

If there is too much deflation:

Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _, it can be argued that _ is/are better off.

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is _, it can be argued that _ is/are worse off.

Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _ in the natural rate of unemployment and _ in price level.

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₁ is based on an expected inflation rate of:

Use the following to answer questions: -(Figure: Short-Run Phillips Curve) Refer to Figure: Short-Run Phillips Curve. SRPC₂ is based on an expected inflation rate of: