Exam 17: Inflation, unemployment, and Federal Reserve Policy

Which of the following is not an appropriate policy for a central bank to follow if the economy is plagued with deflation?

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

Employees at the university have negotiated a 5 percent increase in wages for the next year,based on their inflation expectations.If inflation is actually 6 percent over the next year,which of the following will occur?

Workers and firms are currently expecting the price level to increase from 110 to 114.The Federal Reserve then announces that it will be reducing the growth rate of the money supply.If the Fed's announcement is credible,and firms and workers have rational expectations,describe how the expectations of firms and workers will be affected and how the change in expectations will affect the unemployment rate.

The long-run Phillips curve is ________ than the short-run Phillips curve.

Fed Chairman Alan Greenspan managed to keep the rate of inflation low as the economy was growing at a brisk pace by setting and hitting low money supply growth rate targets.

When a central bank works makes joint decisions with the government's Treasury department,

Figure 17-2 -Refer to Figure 17-2.The nonaccelerating inflation rate of unemployment,or NAIRU,is associated with which point rate in the figure above?

The natural rate of unemployment equals

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

Figure 17-5 -Refer to Figure 17-5.Consider the Phillips curves shown in the above graph.We can conclude from this graph that

The ________ curves are both vertical.

What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation?

One criticism of the Fed's quantitative easing policy is that a prolonged period of low interest rates could lead to speculative bubbles.Some economists argued that as interest rates fell and prices of long-term Treasury bonds rose,financial markets were experiencing a "Treasury bubble." These economists worried that investors,banks,other financial firms,and pension funds were underestimating the likelihood that long-term interest rates would eventually ________,causing substantial ________ in the prices of Treasury bonds.

The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.

Deflation refers to

Figure 17-1 -Refer to Figure 17-1.Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above,and the unemployment rate at A is the natural rate.If the economy was to move to point C,which of the following must be true?

The "rational expectations" school of economists,including Robert Lucas and Thomas Sargent,argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.

Some economists argue that the short-run Phillips curve is not vertical,and that monetary policy can be effective in the short run.Which one of the following is not one of the reasons for this skepticism?

One criticism of the Fed's quantitative easing policy is that low interest rates ________ the return to saving.One key reason people save is to finance their retirement.Retired people typically favor low-risk investments,such as bank certificates of deposit or Treasury bonds.But with the interest rates on these assets reduced to historically low levels,many retired people were forced to either ________ their spending or buy riskier investments.