Question 1

If wages and prices adjust slowly,we would expect expansionary monetary policy to be

Accepted Answer

When wages and prices adjust slowly, expansionary monetary policy is more likely to affect the unemployment rate because it takes time for prices and wages to adjust to the increased money supply, leading to a temporary increase in real output and employment.

Question 2

When individuals use all available information about an economic variable to make a decision,expectations are

Accepted Answer

When individuals use all available information to make a decision, their expectations are considered rational as they are based on informed decision-making processes. This means that the expectations are not underestimates or overestimates of reality and may be accurate. Adaptive expectations, on the other hand, refers to when individuals base their expectations on past experiences rather than all available information.

Question 3

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

The answer of If workers accurately predict the rate of...

Question 4

If workers and firms know that the Bank of Canada is following an expansionary monetary policy,workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

When the Bank of Canada follows an expansionary monetary policy, workers and firms expect inflation to increase. They will adjust nominal wages upwards to maintain their purchasing power, meaning the real wage (wage adjusted for inflation) remains unchanged.

Question 5

When inflation is very low,how do workers and firms adjust their expectations of inflation?

Accepted Answer

The answer of When inflation is very low,how do workers...

Question 6

During which of the following time periods did inflation remain above 5 percent every year?

Accepted Answer

The time period from 1973 through 1982 had inflation rates above 5 percent every year, making it the only option that fits the criteria. The other time periods had fluctuating inflation rates, but not consistently above 5 percent every year.

Question 7

According to economists Robert Lucas and Thomas Sargent,when are the gains to accurately forecasting inflation highest?

Accepted Answer

The gains to accurately forecasting inflation are highest when inflation is high and unstable because in such environments, the ability to predict inflation accurately can significantly impact investment decisions, savings, and consumption. High and unstable inflation introduces uncertainty, making accurate forecasts more valuable for economic planning and decision-making.

Question 8

In the long run,the Bank of Canada may decrease the unemployment rate only if it is willing to increase the rate of inflation.

Accepted Answer

The Bank of Canada can influence unemployment rates through monetary policy without necessarily increasing inflation, especially in the short to medium term, by setting interest rates to stimulate or cool the economy. Long-term unemployment rates are more influenced by structural factors than by the central bank's inflation targets.

Question 9

If actual inflation is greater than expected inflation,what is the relationship between the actual real wage and the expected real wage?

Accepted Answer

If actual inflation is greater than expected inflation, prices will rise more than anticipated. This means that the purchasing power of wages will fall, causing a decrease in the actual real wage compared to the expected real wage.

Question 10

If firms and workers have rational expectations,including knowledge of the policy being used by the Bank of Canada,the short-run Phillips curve will be

Accepted Answer

If firms and workers have rational expectations and knowledge of the policy being used by the Bank of Canada, they will anticipate any changes in policy and adjust their behavior accordingly. This means that the short-run Phillips curve will be vertical because any temporary increase in aggregate demand will only lead to higher prices without affecting the level of output or employment. Therefore, there will be no trade-off between inflation and unemployment in the short run.

Question 11

Figure 13.6  Alt text for Figure 13.6: In figure 13.6,a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.6: The x-axis is labelled,unemployment rate percent.The y-axis is labelled,inflation rate percent per year.A straight line labelled,short-run Philips Curve,begins at the top left corner and slopes down to the end of the x-axis.A straight line labelled,long-run Philips Curve is perpendicular to the x-axis,and begins from the x-axis value 5.Long-run Philips Curve intersects the short-run Philips Curve at point A (5,2),near the bottom of the line and passes through point C (5,4.8%)near the top end.Point B (3%,4.8%)is plotted near the left end of the short-run Philips Curve,with the same y-axis value as point C.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.6.If firms and workers have rational expectations,an expansionary monetary policy will cause the short-run equilibrium to move from

Accepted Answer

The answer of Figure 13.6  Alt text for Figure...

Question 12

Models that focus on factors such as technology shocks rather than "monetary" explanations of fluctuations in real GDP are called

Accepted Answer

Real business cycle models focus on factors such as technology shocks as the primary drivers of fluctuations in real GDP, rather than changes in monetary policy.

Question 13

In which of the following situations might you expect expansionary monetary policy to reduce the unemployment rate?

Accepted Answer

The answer of In which of the following situations might...

Question 14

If firms and workers have rational expectations,including knowledge of the policy being used by the Bank of Canada,

Accepted Answer

If firms and workers have rational expectations and knowledge of the policy being used by the Bank of Canada, they will anticipate the effects of expansionary monetary policy and adjust their behavior accordingly. This means that any increase in demand resulting from the policy will be offset by corresponding increases in prices, wages, and interest rates, leaving real economic activity unchanged. As a result, expansionary monetary policy is likely to be ineffective in this context.

Question 15

Use the following information to draw a graph showing the short-run and long-run Phillips curves,and be sure your graph shows the point where the short-run and long-run Phillips curves intersect.
Natural rate of unemployment = 4 percent
Current rate of unemployment = 5 percent
Expected inflation rate = 3 percent
Current inflation rate = 2 percent

Accepted Answer

The answer of Use the following information to draw a...

Question 16

If people assume that future rates of inflation will follow the pattern of inflation rates in the past,they are said to have

Accepted Answer

If people assume that future rates of inflation will follow the pattern of inflation rates in the past, this is known as adaptive expectations. This means that people base their expectations on past information and adjust them only slowly over time. It is different from rational expectations, which assume that people are able to accurately predict future events based on all available information, and perfect foresight, which assume people can accurately predict future events with complete certainty. Unstable and accommodative expectations are not commonly used terms in economics.

Question 17

Which of the following would be the source of a "real" business cycle?

Accepted Answer

Changes in technology can lead to fluctuations in output and employment levels, as industries adjust to the new technologies and demand patterns. This can result in a "real" business cycle. The other options are related to monetary or fiscal policy and would not be considered a "real" business cycle.

Question 18

Some economists argue that the short-run Phillips curve is not vertical,and that monetary policy can be effective in the short run.Which one of the following is not one of the reasons for this skepticism?

Accepted Answer

If workers and firms have rational expectations, they will anticipate any changes in monetary policy and adjust their behavior accordingly, making it less effective in the short run.

Question 19

Figure 13.6  Alt text for Figure 13.6: In figure 13.6,a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.6: The x-axis is labelled,unemployment rate percent.The y-axis is labelled,inflation rate percent per year.A straight line labelled,short-run Philips Curve,begins at the top left corner and slopes down to the end of the x-axis.A straight line labelled,long-run Philips Curve is perpendicular to the x-axis,and begins from the x-axis value 5.Long-run Philips Curve intersects the short-run Philips Curve at point A (5,2),near the bottom of the line and passes through point C (5,4.8%)near the top end.Point B (3%,4.8%)is plotted near the left end of the short-run Philips Curve,with the same y-axis value as point C.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.6.If firms and workers have adaptive expectations,an expansionary monetary policy will cause the short-run equilibrium to move from

Accepted Answer

With adaptive expectations, when the central bank implements an expansionary monetary policy, firms and workers adjust their expectations based on past inflation rates. Initially, they may not fully anticipate the inflationary impact of the policy. As a result, real wages might temporarily fall, leading firms to increase hiring, which moves the economy from a lower output level to a higher one in the short run. Thus, if the economy is initially at point A (representing a lower output and employment level), an expansionary monetary policy would shift the short-run equilibrium to point B, where output and employment are higher.

Question 20

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by

Accepted Answer

Lucas and Sargent's theory, part of the New Classical Economics, suggests that the short-run trade-off between unemployment and inflation (the Phillips Curve) can occur because workers and firms are temporarily fooled by unexpected changes in monetary policy. They do not immediately realize that a change has occurred, leading to short-term adjustments in employment and inflation until expectations adjust to the new reality.

Quiz 13: Inflation, Unemployment, and Bank of Canada Policy