Exam 17: Inflation, Unemployment, and Federal Reserve Policy

How would you expect the Fed to respond to a negative supply shock in the economy?

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

Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation?

Alejandro expects the price level to rise from 105 this year to 108 next year.If the price level rises to 110 next year instead of 108,which of the following will occur?

A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________.

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

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

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

What can the Federal Reserve do to increase the natural rate of unemployment?

Article Summary Since the Fed introduced its annual goal of an inflation target of 2 percent in January 2012,the personal consumption expenditures price index has fallen short of this goal more than 90 percent of the time.This has prompted some analysts and Fed officials to acknowledge that the Fed has lost some of its credibility in achieving its 2 percent target,and has Fed officials again discussing whether to hold off on raising interest rates.Fed Governor Lael Brainard stated that the Fed's failure to increase inflation to its 2 percent target may have influenced how companies and consumers view the inflation outlook,stating "Households and firms have experienced a prolonged period of inflation below our objective,and that may be affecting their perception of underlying inflation." Since expectations influence the actions of companies and consumers,they help determine where inflation actually ends up.Consumers who are accustomed to low inflation will resist paying up for goods and services,and therefore companies will avoid increasing wages,fearing they won't be able to raise prices to cover the added labor costs.It's a vicious circle that can hinder the Fed from achieving its inflation target. Source: Rich Miller,"Fed Officials Admit They've Lost Some Credibility on Inflation," bloomberg.com,September 13,2017. -Refer to the Article Summary.Some analysts and Fed officials have acknowledged that the Fed has lost some of its credibility in achieving its 2 percent inflation goal,since inflation has fallen short of this goal over 90 percent of the time since it was announced in January 2012.Prior to this,over the past 25 years whenever a change in Fed policy had been announced,the change has ________ taken place,leading to ________ credibility.

Forward guidance refers to central banks

The natural rate of unemployment will not change following an increase in ________ unemployment.

Even if expectations of inflation are rational,sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment.

The ________ curves are both vertical.

If the economy is producing at potential GDP

According to the short-run Phillips curve,if unemployment is 2.4% and inflation is 3.7%,a decrease in the inflation rate might result in which of the following?

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with ________ had lower inflation rates than countries with ________.

When confronted with rational expectations regarding changes in monetary policy,the short-run Phillips curve may be vertical.

Figure 17-2 -Refer to Figure 17-2.At which point are inflation expectations equal to the actual inflation rate?

What impact does monetary policy have on the long-run Phillips curve?