Question 1

If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.

Accepted Answer

In a liquidity trap, interest rates are already very low and cannot be lowered further through monetary policy. Therefore, monetary policy is ineffective. However, fiscal policy can still be effective as it involves government spending and taxation which can directly affect aggregate demand. Therefore, fiscal policy is the best option in a liquidity trap.

Question 2

If there is too much deflation:

Accepted Answer

The answer of If there is too much deflation:
...

Question 3

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 the economic malaise that Japan experienced in the 1990s, characterized by prolonged periods of deflation and low economic growth. If Fed officials are worried about the possibility of "Japanification" in the United States, it means they are concerned that the US economy could fall into a deflationary trap, similar to what happened in Japan.

Question 4

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 inflation.

Accepted Answer

The answer of Suppose the economy is in long-run equilibrium....

Question 5

A liquidity trap results from:

Accepted Answer

A liquidity trap occurs when nominal interest rates are close to zero, limiting the ability of monetary policy to stimulate economic growth. When interest rates cannot be lowered further, expansionary monetary policy becomes ineffective in stimulating borrowing and economic activity. This situation can arise when the economy is in a deep recession, causing individuals and businesses to hoard money rather than invest or spend it. The Fisher effect refers to the relationship between nominal interest rates and inflation, but it is not directly related to a liquidity trap. Similarly, the inflation tax and expansionary fiscal policy are not directly related to a liquidity trap.

Question 6

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

The answer of Expecting the inflation rate to be 3%,...

Question 7

There is a zero bound to:

Accepted Answer

The zero bound refers to the lower limit to nominal interest rates, meaning that interest rates cannot go below zero. This is because if interest rates were negative, it would create an incentive for people to hold onto physical currency rather than deposit money in banks, leading to a decrease in the money supply and potentially worsening the economy. Therefore, nominal interest rates cannot go below zero, creating a zero bound.

Question 8

Use the following to answer questions Figure: Short-Run Phillips Curve -(Figure: Short-Run Phillips Curve) Look at the 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 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 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

This statement is true. The late 1970s were a period of high inflation in the United States, with prices increasing at an annual rate of 13% in 1979. This was due to a combination of factors, including rising oil prices, a weak dollar, and expansionary monetary policies. It took several years of tight monetary policy and recession to bring inflation back down to more manageable levels in the 1980s.

Question 11

During periods of deflation _____ will be hurt and _____ will be helped.

Accepted Answer

During deflation, the value of money increases and therefore the purchasing power of borrowers' income decreases. This means borrowers will be hurt as they will have to pay back loans with money that is more valuable than when they borrowed it. On the other hand, lenders will be helped as they will receive payments that have more value than the loan they provided. Thus, choice B - borrowers; lenders - is the correct answer.

Question 12

In a liquidity trap:

Accepted Answer

In a liquidity trap, the nominal interest rate is already at or near zero, and therefore cannot be reduced further through expansionary monetary policy. This makes it difficult for the central bank to stimulate borrowing, investment, and consumer spending, which can lead to a persistent recessionary gap. Choice A is incorrect because the real interest rate can still be positive even if the nominal interest rate can't be lowered. Choice B is incorrect because a lack of liquidity would lead to a decrease in spending regardless of the interest rate, but it's not the primary cause of a liquidity trap. Choice D is incorrect because lenders may still be able to earn a positive return on their loans, especially if inflation is low or negative.

Question 13

When economists state that there is a zero bound on nominal interest rates, they mean that:

Accepted Answer

The zero bound on nominal interest rates means that the nominal interest rate cannot go below zero. This is a limit on how low central banks can set interest rates in order to stimulate the economy during times of recession or low inflation. However, the real interest rate (the nominal interest rate adjusted for inflation) can still be negative when inflation exceeds the nominal interest rate.

Question 14

The liquidity trap is associated with all of the following EXCEPT:

Accepted Answer

The liquidity trap is associated with a large reduction in the demand for loanable funds, the nominal interest rate falling to zero, and monetary policy becoming ineffective. However, fiscal policy can still be effective in stimulating economic activity during a liquidity trap by increasing government spending or cutting taxes. Therefore, option D is incorrect.

Question 15

Use the following to answer questions 
Figure: Short-Run Phillips Curve 
-(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The natural rate of unemployment is:

Accepted Answer

The point where the SRPC intersects with the vertical axis represents the natural rate of unemployment, which is 5% in this case.

Question 16

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

The answer of Expecting the inflation rate to be 3%,...

Question 17

Liquidity traps are most likely to occur when the:

Accepted Answer

Liquidity traps occur when interest rates are extremely low, and the public expects deflation. In such a situation, people would prefer to hold onto their cash rather than spend it or invest it, which can result in a decrease in economic activity. This can make monetary policy ineffective since lowering interest rates further would not encourage people to spend or borrow more.

Question 18

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

Accepted Answer

The vertical axis on the figure shows the inflation rate, and the horizontal axis shows the unemployment rate. The curve labeled SRPC₂ indicates that at an expected inflation rate of 2%, the economy experiences an unemployment rate of 5% and an inflation rate of 2%. Therefore, the expected inflation rate is 2%.

Question 19

Inability to use monetary policy because the nominal rate of interest cannot fall below zero is called:

Accepted Answer

The inability to use monetary policy when the nominal rate of interest cannot fall below zero is known as the liquidity trap. This means that central banks cannot effectively stimulate the economy by reducing interest rates any further, as they are already at or near zero. This can lead to a situation where economic growth is stagnant and deflation takes hold, which can be difficult to escape without unconventional policies such as quantitative easing or negative interest rates.

Question 20

Use the following to answer questions 
Figure: Short-Run Phillips Curve 
-(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The NAIRU is:

Accepted Answer

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the unemployment rate at which there is no cyclical component of inflation, meaning the economy is at its natural rate of unemployment. In the given figure, the short-run Phillips Curve intersects the x-axis at an unemployment rate of approximately 5%, indicating that this is the NAIRU.

Quiz 28: Inflation, Disinflation, and Deflation

If the economy is in a liquidity trap, monetary policy is _ and fiscal policy is _.

If there is too much deflation:

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 inflation.

A liquidity trap results from:

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.

There is a zero bound to:

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

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

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%.

During periods of deflation _ will be hurt and _ will be helped.

In a liquidity trap:

When economists state that there is a zero bound on nominal interest rates, they mean that:

The liquidity trap is associated with all of the following EXCEPT:

Use the following to answer questions Figure: Short-Run Phillips Curve -(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The natural rate of unemployment is:

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.

Liquidity traps are most likely to occur when the:

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

Inability to use monetary policy because the nominal rate of interest cannot fall below zero is called:

Use the following to answer questions Figure: Short-Run Phillips Curve -(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The NAIRU is:

Quiz 28: Inflation, Disinflation, and Deflation

If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.

If there is too much deflation:

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 inflation.

A liquidity trap results from:

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.

There is a zero bound to:

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

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

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%.

During periods of deflation _____ will be hurt and _____ will be helped.

In a liquidity trap:

When economists state that there is a zero bound on nominal interest rates, they mean that:

The liquidity trap is associated with all of the following EXCEPT:

Use the following to answer questions Figure: Short-Run Phillips Curve -(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The natural rate of unemployment is:

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.

Liquidity traps are most likely to occur when the:

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

Inability to use monetary policy because the nominal rate of interest cannot fall below zero is called:

Use the following to answer questions Figure: Short-Run Phillips Curve -(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. The NAIRU is:

If the economy is in a liquidity trap, monetary policy is _ and fiscal policy is _.

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 inflation.

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 -(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC₁ is based on an expected inflation rate of:

During periods of deflation _ will be hurt and _ will be helped.

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.

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