Question 1

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

Accepted Answer

A)  The Fed could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent. 
B)  The Fed could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. 
C)  The Fed could follow contractionary monetary policy that would reduce the federal funds rate to zero so investment will rise consistently. 
D)  The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal. 
A)  The Fed could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent. 
B)  The Fed could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. 
C)  The Fed could follow contractionary monetary policy that would reduce the federal funds rate to zero so investment will rise consistently. 
D)  The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal.

Question 2

When will an increase in aggregate demand not result in lower unemployment rates in the short run?

Accepted Answer

An increase in aggregate demand will not

Question 3

Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ________ slope of the short-run Phillips curve.

Accepted Answer

A)  positive 
B)  negative 
C)  zero 
D)  infinite 
A)  positive 
B)  negative 
C)  zero 
D)  infinite

Question 4

The major criticism of real business cycle models is

Accepted Answer

A)  negative technology shocks are uncommon and can't explain all business cycle fluctuations. 
B)  positive technology shocks actually push real GDP above the economy's potential GDP. 
C)  negative technology shocks actually push real GDP below the economy's potential GDP 
D)  this model relies too heavily on monetary explanations for fluctuations in real GDP. 
A)  negative technology shocks are uncommon and can't explain all business cycle fluctuations. 
B)  positive technology shocks actually push real GDP above the economy's potential GDP. 
C)  negative technology shocks actually push real GDP below the economy's potential GDP 
D)  this model relies too heavily on monetary explanations for fluctuations in real GDP.

Question 5

What is the relationship between the short-run Phillips curve and the long-run Phillips curve?

Accepted Answer

Along the short-run Phillips curve, the

Question 6

Which of the following would decrease the natural rate of unemployment?

Accepted Answer

A)  a decrease in the number of younger, less skilled workers in the economy 
B)  an increase in the generosity of unemployment insurance programs 
C)  fewer restrictions on unions to negotiate wage changes with companies 
D)  a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly 
A)  a decrease in the number of younger, less skilled workers in the economy 
B)  an increase in the generosity of unemployment insurance programs 
C)  fewer restrictions on unions to negotiate wage changes with companies 
D)  a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly

Question 7

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

Accepted Answer

A)  nothing 
B)  follow expansionary monetary policy that will increase inflation 
C)  follow expansionary monetary policy that will reduce inflation 
D)  follow contractionary monetary policy that will increase inflation 
A)  nothing 
B)  follow expansionary monetary policy that will increase inflation 
C)  follow expansionary monetary policy that will reduce inflation 
D)  follow contractionary monetary policy that will increase inflation

Question 8

Figure 28-2  
-Refer to Figure 28-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?

Accepted Answer

A)  Inflation will accelerate in the long run. 
B)  Inflationary expectations will decline. 
C)  Unemployment will rise above the natural rate. 
D)  Unemployment will accelerate in the long run. 
A)  Inflation will accelerate in the long run. 
B)  Inflationary expectations will decline. 
C)  Unemployment will rise above the natural rate. 
D)  Unemployment will accelerate in the long run.

Question 9

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

Accepted Answer

A)  The actual real wage is lower than the expected real wage. 
B)  The actual real wage is higher than the expected real wage. 
C)  The actual real wage is equal to the expected real wage. 
D)  The relationship between the actual real wage and the expected real wage cannot be predicted. 
A)  The actual real wage is lower than the expected real wage. 
B)  The actual real wage is higher than the expected real wage. 
C)  The actual real wage is equal to the expected real wage. 
D)  The relationship between the actual real wage and the expected real wage cannot be predicted.

Question 10

If workers and firms have rational expectations, they understand that ________ monetary policy will raise the inflation rate, so actual inflation ________ expected inflation.

Accepted Answer

A)  expansionary; will be equal to 
B)  expansionary; will be greater than 
C)  contractionary; will be equal to 
D)  contractionary; will be less than 
E)  expansionary; will be less than 
A)  expansionary; will be equal to 
B)  expansionary; will be greater than 
C)  contractionary; will be equal to 
D)  contractionary; will be less than 
E)  expansionary; will be less than

Question 11

Figure 28-4  
-Refer to Figure 28-4. Consider the shift in the short-run Phillips curves shown in the above graph. This shift may be explained by

Accepted Answer

A)  an increase in the natural rate of unemployment from 5.0 to 6.2 percent. 
B)  an increase in the expected rate of inflation from 4.0 to 5.5 percent. 
C)  either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an increase in the expected rate of inflation from 4.0 to 5.5 percent. 
D)  None of the above is correct. 
A)  an increase in the natural rate of unemployment from 5.0 to 6.2 percent. 
B)  an increase in the expected rate of inflation from 4.0 to 5.5 percent. 
C)  either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an increase in the expected rate of inflation from 4.0 to 5.5 percent. 
D)  None of the above is correct.

Question 12

If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use contractionary monetary policy?

Accepted Answer

A)  if the natural rate of unemployment is below 5% 
B)  if the natural rate of unemployment is above 5% 
C)  if the inflation rate is above 5% 
D)  if the inflation rate is below 5% 
A)  if the natural rate of unemployment is below 5% 
B)  if the natural rate of unemployment is above 5% 
C)  if the inflation rate is above 5% 
D)  if the inflation rate is below 5%

Question 13

A reduction in the rate of inflation is referred to as

Accepted Answer

A)  unemployment. 
B)  recession. 
C)  disinflation. 
D)  deflation. 
A)  unemployment. 
B)  recession. 
C)  disinflation. 
D)  deflation.

Question 14

Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored.

Accepted Answer

A)  25 
B)  42 
C)  64 
D)  81 
A)  25 
B)  42 
C)  64 
D)  81

Question 15

Figure 28-2  
-Refer to Figure 28-2. The nonaccelerating inflation rate of unemployment, or NAIRU, is associated with which point rate in the figure above?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  all of the above 
A)  A 
B)  B 
C)  C 
D)  all of the above

Question 16

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?

Accepted Answer

A)  The short-run Phillips curve shifts down. 
B)  The short-run Phillips curve shifts up. 
C)  The short-run Phillips curve becomes the long-run Phillips curve. 
D)  The short-run Phillips curve is not affected by expansionary monetary policy. 
A)  The short-run Phillips curve shifts down. 
B)  The short-run Phillips curve shifts up. 
C)  The short-run Phillips curve becomes the long-run Phillips curve. 
D)  The short-run Phillips curve is not affected by expansionary monetary policy.

Question 17

Matt's real wage in 2014 is $26.80. If the price level is 104, what is Matt's nominal wage?

Accepted Answer

A)  $30.80 
B)  $27.87 
C)  $26.80 
D)  $25.77 
A)  $30.80 
B)  $27.87 
C)  $26.80 
D)  $25.77

Question 18

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?

Accepted Answer

A)  Alejandro's real wage remains unchanged. 
B)  Alejandro's real wage falls. 
C)  Alejandro's real wage rises. 
D)  Alejandro's real wage may rise or fall, depending on the unemployment rate. 
A)  Alejandro's real wage remains unchanged. 
B)  Alejandro's real wage falls. 
C)  Alejandro's real wage rises. 
D)  Alejandro's real wage may rise or fall, depending on the unemployment rate.

Question 19

If the Phillips curve represents a "structural relationship," then

Accepted Answer

A)  the trade-off between unemployment and inflation is permanent. 
B)  the trade-off between unemployment and inflation holds only for the short run. 
C)  the trade-off between unemployment and inflation holds in the long run, but not in the short run. 
D)  the Phillips curve will be vertical in the long run. 
A)  the trade-off between unemployment and inflation is permanent. 
B)  the trade-off between unemployment and inflation holds only for the short run. 
C)  the trade-off between unemployment and inflation holds in the long run, but not in the short run. 
D)  the Phillips curve will be vertical in the long run.

Question 20

Figure 28-1  
-Refer to Figure 28-1. 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 B, which of the following must be true?

Accepted Answer

A)  The economy is producing a level of GDP equal to potential GDP. 
B)  Aggregate demand must have increased. 
C)  Equilibrium GDP at point B must be below potential GDP. 
D)  The Fed conducted expansionary policy to cause the move. 
E)  The Fed purchased treasury bills to cause the move. 
A)  The economy is producing a level of GDP equal to potential GDP. 
B)  Aggregate demand must have increased. 
C)  Equilibrium GDP at point B must be below potential GDP. 
D)  The Fed conducted expansionary policy to cause the move. 
E)  The Fed purchased treasury bills to cause the move.

Exam 28: Inflation, Unemployment, and Federal Reserve Policy

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

When will an increase in aggregate demand not result in lower unemployment rates in the short run?

Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ________ slope of the short-run Phillips curve.

The major criticism of real business cycle models is

What is the relationship between the short-run Phillips curve and the long-run Phillips curve?

Which of the following would decrease the natural rate of unemployment?

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

Figure 28-2 -Refer to Figure 28-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?

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

If workers and firms have rational expectations, they understand that ________ monetary policy will raise the inflation rate, so actual inflation ________ expected inflation.

Figure 28-4 -Refer to Figure 28-4. Consider the shift in the short-run Phillips curves shown in the above graph. This shift may be explained by

If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use contractionary monetary policy?

A reduction in the rate of inflation is referred to as

Figure 28-2 -Refer to Figure 28-2. The nonaccelerating inflation rate of unemployment, or NAIRU, is associated with which point rate in the figure above?

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?

Matt's real wage in 2014 is $26.80. If the price level is 104, what is Matt's nominal wage?

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?

If the Phillips curve represents a "structural relationship," then

Figure 28-1 -Refer to Figure 28-1. 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 B, which of the following must be true?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

If workers and firms have rational expectations, they understand that monetary policy will raise the inflation rate, so actual inflation expected inflation.