Exam 14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles

In the long run, the economy is better off if policymakers exploit the short-run tradeoff between inflation and the unemployment rate.

If credible low-money-growth policies were continually pursued by the Fed, nominal wages and prices would eventually fall as the economic agents would expect lower inflation rates over time.

Wages are said to be "sticky downwards" because this promotes good work effort and ensures that workers and firms share the same goals of efficient production and profit maximization.

Which of the following gives the Fed a credibility problem because the Fed may change its planned policies in light of new economic developments?

Identify the correct statement.

The figure given below represents the short run and long run Phillips curve. Figure 14.4 -Refer to Figure 14.4. Suppose the rational expectations hypothesis holds, and the Fed implements a fully expected increase in money supply growth. Starting from point C in the short run, the economy will tend to move to:

The long-run Phillips curve corresponds to the vertical region of the aggregate supply curve.

If nominal wage rates are contractually determined and cannot change in the short run, then an unexpected increase in the inflation rate will:

When the reservation wage is adjusted to account for a higher inflation rate:

The figure given below represents the short run and long run Phillips curve. Figure 14.4 -Refer to Figure 14.4. If the adaptive expectations hypothesis holds, and the economy moves from point C to point D because of expansionary fiscal policy, what rate of inflation are people expecting at point D?

Suppose the inflation rate has been 6 percent over the past four years. If the Federal Reserve announces an increase in the growth of the money supply, adaptive expectations would predict an inflation rate of 6 percent.

Worldwide statistics prove that, when economies experience recessions, unemployment rates rise and wages fall.

When workers expect more inflation than actually occurs:

Which of the following is most likely to increase the natural rate of unemployment?

Suppose the inflation rate has risen 0.5 percent a year for the past three years. Using this experience an individual forecasts a 0.5 percent rise in the coming year's inflation rate. This is an example of:

Since the growth in the money supply is unrelated to government spending, fiscal policy and monetary policy can be conducted independently.

The shape of the long-run Phillips curve suggests that over a long time horizon there is a magnified tradeoff between the unemployment rate and inflation.

Suppose that a labor union negotiates an increase in wages of 4 percent for the coming year because annual inflation for the past five years has been 4 percent. The expectations formed by the union are:

If the percentage increase in nominal wage rates is less than the percentage increase in the price level, then:

Suppose that an increase in aggregate demand causes an unplanned depletion in business inventories. Which of the following situations will result from this?