Question 1

Monetary policy can

Accepted Answer

Monetary policy can affect the short-run trade-off between inflation and unemployment by influencing expected inflation. In the short run, if people expect higher inflation due to monetary policy actions, it can temporarily lower unemployment as workers and firms adjust to the new expectations. However, in the long run, the Phillips curve is vertical, indicating no trade-off between inflation and unemployment, as expectations adjust fully. Changes in monetary policy do not affect the natural rate of unemployment in the long run.

Question 2

When individuals use ________ about an economic variable to make a decision,expectations are rational.

Accepted Answer

Rational expectations theory assumes that individuals incorporate all available information about an economic variable when making decisions, including historical information, information announced by the Fed, and information garnered in the private sector. Therefore, choice C, which includes all available information, is the best answer.

Question 3

According to the "rational expectations" school of thought in macroeconomics,the short-run Phillips curve is ________ in face of unanticipated changes in monetary policy.

Accepted Answer

The answer of According to the "rational expectations" school of...

Question 4

Figure 17-8 
-Refer to Figure 17-8.A typical long-run Phillips curve would have the appearance of a curve running through points

Accepted Answer

A long-run Phillips curve is vertical at the natural rate of unemployment level, which corresponds to point B in the figure. Therefore, a typical long-run Phillips curve would only run through points B and C.

Question 5

The actual real wage is lower than the expected real wage if

Accepted Answer

The real wage is calculated by adjusting the nominal wage for inflation. If expected inflation is less than actual inflation, the real wage will be lower than expected because the nominal wage has not kept up with the rise in prices.

Question 6

According to ________,the economy is normally at potential GDP.

Accepted Answer

According to real business cycle models, the economy is normally at its potential GDP because they view economic fluctuations as being driven by real shocks to productivity and technology rather than by changes in aggregate demand.

Question 7

If changes in inflation are higher than expected,

Accepted Answer

The answer of If changes in inflation are higher than...

Question 8

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

Accepted Answer

If wages and prices adjust rapidly, expansionary monetary policy is less likely to affect the unemployment rate. This is because as wages and prices quickly adjust to changing economic conditions, any increase in the money supply will be quickly offset by a corresponding increase in prices, leading to no real change in production or employment. This is known as the neutrality of money in the long run. Therefore, expansionary monetary policy is less likely to have any significant impact on the unemployment rate.

Question 9

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

Accepted Answer

If actual inflation is less than expected inflation, it means that prices are rising less than what people had anticipated. As a result, the purchasing power of wages is higher than expected. This means that the actual real wage is higher than the expected real wage.

Question 10

Figure 17-7 
-Refer to Figure 17-7.Consider the Phillips curves depicted in the graph above.The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year,and it succeeds.If expectations of inflation are not altered by the Fed's announcement,the rate of unemployment will be ________ in the short run.

Accepted Answer

The answer of Figure 17-7 
-Refer to Figure 17-7.Consider the...

Question 11

Figure 17-7 
-Refer to Figure 17-7.Consider the Phillips curves depicted in the graph above.The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year,and it succeeds.If expectations of inflation are reduced to 8 percent by the Fed's announcement,the rate of unemployment will be ________ in the short run.

Accepted Answer

According to the Phillips curve, decreasing inflation from 10% to 5% will lead to an increase in unemployment in the short run. However, if expectations of inflation are also reduced to 8%, the Phillips curve will shift down, resulting in a lower rate of unemployment. Based on the graph, it is likely that the new short-run equilibrium will be between 5.5% and 7.5% unemployment. Therefore, choice C is the best answer.

Question 12

According to the "rational expectations" school of thought in macroeconomics,the short-run Phillips curve is ________ in face of anticipated changes in monetary policy.

Accepted Answer

According to the rational expectations school of thought, individuals will adjust their expectations of inflation in response to anticipated changes in monetary policy. This means that the short-run Phillips curve will be vertical, as any attempt by policymakers to reduce unemployment through expansionary monetary policy will only result in higher inflation expectations and ultimately no reduction in unemployment.

Question 13

With which of the following statements would a "real business cycle" theorist most closely agree?

Accepted Answer

Real business cycle theorists believe that changes in productivity and technology drive business cycles, rather than changes in monetary policy or aggregate demand. Therefore, they would most closely agree with the statement that "wages adjust rapidly to changes in inflation as long as expectations are formed rationally," as this reflects their belief in the flexibility of the labor market in response to shifts in the economy.

Question 14

If people assume that future rates of inflation will ________,they are said to have adaptive expectations.

Accepted Answer

Adaptive expectations assumes that future rates of inflation will follow the pattern of inflation rates in the past. This means that people assume that inflation rates will remain relatively stable and predictable based on past trends.

Question 15

According to economists Robert Lucas and Thomas Sargent,the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of

Accepted Answer

Lucas and Sargent argued that the short-run trade-off between unemployment and inflation, observed in the 1950s and 1960s, was primarily due to unexpected changes in monetary policy. They suggested that when the central bank unexpectedly increased the money supply, inflation would temporarily rise, and unemployment would fall, as people did not immediately adjust their expectations of inflation. This phenomenon is related to the concept of the Phillips curve, which posits an inverse relationship between unemployment and inflation in the short run. However, once people adjusted their expectations, the trade-off would disappear, leading to higher inflation without a corresponding decrease in unemployment.

Question 16

Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called

Accepted Answer

Real business cycle models focus on factors such as changes in technology, labor productivity, natural disasters, and other real shocks to explain fluctuations in real GDP, rather than changes in the money supply.

Question 17

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy,which of the following would you expect to see?

Accepted Answer

Manipulating monetary policy to continue reducing unemployment would result in an increase in money supply and lower interest rates, leading to an increase in spending and borrowing. This can push up demand and prices, leading to inflationary pressure. Therefore, the Fed's policies would be expected to be inflationary.

Question 18

Figure 17-7 
-Refer to Figure 17-7.Consider the Phillips curves depicted in the graph above.The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year,and it succeeds.If the assumptions of the rational expectations school hold true,and the Fed's announcement is credible,the rate of unemployment will be ________ in the short run.

Accepted Answer

According to the rational expectations school, if the Fed's announcement to decrease inflation is credible, people will adjust their expectations immediately. This means the economy can move to the lower inflation rate without experiencing the temporary increase in unemployment depicted by the traditional Phillips curve. Therefore, the unemployment rate will remain at the natural rate, which is depicted as 5.5 percent in this scenario.

Question 19

If rational workers and firms know that the Federal Reserve is following a contractionary monetary policy,they will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

When the Federal Reserve follows a contractionary monetary policy, it reduces the money supply, leading to a decrease in aggregate demand and consumer spending. As a result, the prices of goods and services fall, causing deflationary pressure, not inflation. Rational workers and firms will expect prices to fall and will adjust wages accordingly, leading to a decrease in the real wage. Therefore, option B is the correct answer.

Question 20

________ would be the source of a "real" business cycle.

Accepted Answer

Technology shocks are considered the source of a "real" business cycle because changes in technology affect the production function and can cause changes in output, employment, and other economic variables. Anticipated and unanticipated changes in monetary policy can also have an impact on the business cycle, but they are considered to be part of the "nominal" business cycle, which is driven by changes in the price level and interest rates. Therefore, while all of the choices may have an impact on the business cycle, only A is considered the source of a "real" business cycle.

Quiz 17: Inflation, unemployment, and Federal Reserve Policy