Exam 28: Inflation, Unemployment, and Federal Reserve Policy

Deflation refers to

If the Federal Reserve announces that its target for the federal funds rate is falling from 3 percent to 2.25 percent, how do you expect workers and firms to react?

What is a "structural" relationship?

Evidence shows that for many people, delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills, making it harder for them to find employment. This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment?

An increase in expected inflation will

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

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.

An increase in the inflation rate increases employment only if the increase in inflation is unexpected.

Article Summary In a September 2013 speech to the Independent Bankers Association of Texas, Federal Reserve Bank of Dallas president Richard Fisher stated that the Fed's credibility was harmed when it announced the previous week that it would continue its large bond purchasing program. In June, Fed Chairman Ben Bernanke had stated that that the program could begin to be cut back later in the year, and several other Fed officials expressed being open to the announced timing of this policy. Bernanke's change in his announced timeline of the Fed's intentions regarding the bond purchasing program brought criticism that the Fed had misled investors. In his speech, Fisher stated "I disagreed with the decision of the committee and argued against it. Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question. I believe that is exactly what has occurred, though I take no pleasure in saying so." Fisher has been a long-time opponent of the Fed's bond purchasing program, claiming it is ineffective and may well lead to future inflation, and had been calling for the Fed to begin phasing out this program in September. Source: "Fisher: Standing pat on policy hurt Fed's credibility," Reuters, September 23, 2013. -Refer to the Article Summary. If the Federal Reserve's announcements about upcoming monetary policy decisions are not seen as credible, as Richard Fisher alludes to regarding the announcements about the bond purchasing program, which of the following would you expect to see?

Figure 28-1 -Refer to Figure 28-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

If the economy experiences a negative supply shock, which of the following will be true?

Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations.

According to the short-run Phillips curve, which of the following would result in high rates of unemployment?

When will a decrease in aggregate demand not result in a lower inflation rate in the short run?

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008. Which of the following was one of those actions?

If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?

If inflation falls from 11% to 5%, there is deflation.

The short-run Phillips curve will shift if there is

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

If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent.