Question 1

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 form expectations based on all available information. Therefore, if they anticipate changes in monetary policy, they will adjust their behavior accordingly, and there will be no short-run tradeoff between inflation and unemployment. As a result, the short-run Phillips curve will be vertical, indicating that changes in monetary policy will only affect the level of prices and not real economic activity.

Question 2

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

Accepted Answer

If the expected inflation is lower than actual inflation, then the actual cost of living will be higher than expected, which means that the real wage will be lower than expected. This is because inflation erodes the purchasing power of money, so a higher than expected inflation rate reduces the value of wages.

Question 3

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

B and C are points of potential output, meaning that there is no tradeoff between inflation and unemployment at those levels of output. A is a point below potential output where there is a negative relationship between inflation and unemployment. Therefore, a typical long-run Phillips curve would run through points B and C, where there is a vertical Phillips curve indicating no tradeoff between inflation and unemployment.

Question 4

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 5

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

Accepted Answer

Real business cycle models argue that the economy is always at potential GDP, as fluctuations in economic activity are largely driven by exogenous shocks to productivity and technology. Therefore, the economy is expected to naturally adjust back to its potential output level without intervention from policy makers.

Question 6

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

If the Fed is following a contractionary monetary policy, it means that they are reducing the money supply and increasing interest rates to slow down inflation. Rational workers and firms will expect inflation to decrease as a result, and they will adjust their wages and prices accordingly. As a result, the real wage will remain unchanged even though nominal wages may decrease.

Question 7

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

If the Fed announces its intention to decrease inflation and succeeds, but expectations of inflation are only reduced to 8 percent, the economy would move along the short-run Phillips curve associated with 8 percent inflation expectations. This would result in a short-run unemployment rate that is higher than the original (associated with lower inflation expectations) but not as high as it would be without any change in expectations. Therefore, the unemployment rate would be between the rates associated with the original and fully adjusted expectations, which are 5.5 percent and 7.5 percent, respectively.

Question 8

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 9

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

Accepted Answer

If the Federal Reserve attempts to reduce unemployment by manipulating monetary policy, it will likely make their policies more inflationary. When the Fed stimulates aggregate demand, it increases the pressure on prices and wages, leading to inflationary pressures. This is especially true if the policymaker tries to decrease unemployment below the natural rate, which may lead to higher inflation rates.

Question 10

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 11

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 12

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

Accepted Answer

Adaptive expectations refer to the assumption that future rates of inflation will follow the pattern of inflation rates in the past. In other words, people base their expectations of future inflation on their experiences with inflation in the past. This is in contrast to rational expectations, where people base their predictions of future inflation on all available information, not just past trends. The other choices are incorrect as they do not align with the definition of adaptive expectations.

Question 13

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

Accepted Answer

Rational expectations theory suggests that individuals use all available information about an economic variable, including historical data, current conditions, and any announcements or policies made by the government or relevant institutions, to form their expectations about future outcomes. Therefore, using only historical information (A), information only from the Fed (B), or only information from the private sector (D) would not represent a comprehensive approach to forming rational expectations.

Question 14

If changes in inflation are higher than expected,

Accepted Answer

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

Question 15

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 16

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

Accepted Answer

If wages and prices adjust rapidly, it means that they are responsive to changes in monetary policy. In this case, expansionary monetary policy is less likely to affect the unemployment rate because any increase in demand caused by the policy will quickly be met with an increase in wages and prices, leading to higher inflation but little change in unemployment. This indicates that the Phillips curve is steeper (less flat) or nearly vertical, making it more difficult to trade inflation for unemployment using monetary policy.

Question 17

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

Accepted Answer

The models that focus on factors other than changes in the money supply (such as productivity shocks, technological innovations, and changes in preferences and regulations) to explain fluctuations in real GDP are known as real business cycle models.

Question 18

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

Accepted Answer

Technology shocks, such as major innovations or changes in production processes, can cause fluctuations in the economy that are not driven by policy decisions. Anticipated changes in monetary policy and unanticipated changes in monetary policy can also have an impact on the economy, but they are more closely tied to policy decisions and may not qualify as a "real" business cycle.

Question 19

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 20

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, then prices are rising less quickly than anticipated. This means that the purchasing power of a worker's wage is higher than expected, resulting in a higher real wage. Thus, the actual real wage is higher than the expected real wage.

Quiz 17: Inflation,unemployment,and Federal Reserve Policy