Question 1

One problem with deflation is that it can raise the real value of debt.

Accepted Answer

A) True 
 B)False

Question 2

Evidence shows that many people who delay searching for a job for a year or longer after they are laid off

Accepted Answer

A)  find it more difficult to find new employment than if they had searched for a new job soon after they were laid off. 
B)  find it easier to find new employment than if they had searched for a new job soon after they were laid off. 
C)  find that they have little to no chance to find new employment after being unemployed for so long. 
D)  find that the extra unemployment benefits they receive during their extended period of unemployment more than make up for the difficulty in finding a job once they decide to re-enter the workforce. 
A)  find it more difficult to find new employment than if they had searched for a new job soon after they were laid off. 
B)  find it easier to find new employment than if they had searched for a new job soon after they were laid off. 
C)  find that they have little to no chance to find new employment after being unemployed for so long. 
D)  find that the extra unemployment benefits they receive during their extended period of unemployment more than make up for the difficulty in finding a job once they decide to re-enter the workforce.

Question 3

Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?

Accepted Answer

A)  Gretchen's real wage will be unchanged. 
B)  Gretchen's real wage will fall. 
C)  Gretchen's real wage will rise. 
D)  Gretchen's real wage may rise or fall, depending on the unemployment rate. 
A)  Gretchen's real wage will be unchanged. 
B)  Gretchen's real wage will fall. 
C)  Gretchen's real wage will rise. 
D)  Gretchen's real wage may rise or fall, depending on the unemployment rate.

Question 4

Figure 28-7  
-Refer to Figure 28-7. Consider the Phillips curves depicted in the graph above. The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Fed's announcement, the rate of unemployment will be ________ in the short run.

Accepted Answer

A)  less than 5.5 percent 
B)  5.5 percent 
C)  between 5.5 and 7.5 percent 
D)  7.5 percent 
A)  less than 5.5 percent 
B)  5.5 percent 
C)  between 5.5 and 7.5 percent 
D)  7.5 percent

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

Accepted Answer

A)  3 percent 
B)  more than 3 percent 
C)  less than 3 percent 
D)  depends on actual inflation for next year 
A)  3 percent 
B)  more than 3 percent 
C)  less than 3 percent 
D)  depends on actual inflation for next year

Question 7

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

Accepted Answer

To reduce inflation, the Federal Reserve

Question 8

Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent. Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Federal Reserve keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph.

Accepted Answer

The supply shock will shift the short-ru

Question 9

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

Accepted Answer

A) True 
 B)False

Question 10

A falling price level is called ________ and a fall in the rate of inflation is called ________.

Accepted Answer

A)  disinflation; a contraction 
B)  a contraction; disinflation 
C)  disinflation; deflation 
D)  deflation; disinflation 
A)  disinflation; a contraction 
B)  a contraction; disinflation 
C)  disinflation; deflation 
D)  deflation; disinflation

Question 11

Figure 28-1  
-Refer to Figure 28-1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point C in the long run?

Accepted Answer

A)  Buy treasury bills. 
B)  Sell treasury bills. 
C)  Lower the discount rate. 
D)  Increase the money supply. 
E)  No policy will move the economy to point C in the long run. 
A)  Buy treasury bills. 
B)  Sell treasury bills. 
C)  Lower the discount rate. 
D)  Increase the money supply. 
E)  No policy will move the economy to point C in the long run.

Question 12

In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.

Accepted Answer

A)  disinflation; high unemployment 
B)  steep inflation; low unemployment 
C)  disinflation; low unemployment 
D)  steep inflation; high unemployment 
E)  deflation; high unemployment 
A)  disinflation; high unemployment 
B)  steep inflation; low unemployment 
C)  disinflation; low unemployment 
D)  steep inflation; high unemployment 
E)  deflation; high unemployment

Question 13

If the economy is producing ________, unemployment is at its natural rate.

Accepted Answer

A)  at potential GDP 
B)  above potential GDP 
C)  at an inflation rate of zero 
D)  at an unemployment rate of zero 
A)  at potential GDP 
B)  above potential GDP 
C)  at an inflation rate of zero 
D)  at an unemployment rate of zero

Question 14

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 C, 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 decreased. 
C)  Equilibrium GDP at point C must be above potential GDP. 
D)  The Fed conducted contractionary policy to cause the move. 
E)  The Fed sold treasury bills to cause the move. 
A)  The economy is producing a level of GDP equal to potential GDP. 
B)  Aggregate demand must have decreased. 
C)  Equilibrium GDP at point C must be above potential GDP. 
D)  The Fed conducted contractionary policy to cause the move. 
E)  The Fed sold treasury bills to cause the move.

Question 15

According to real business cycle models,

Accepted Answer

A)  the long-run Phillips curve is negatively sloped. 
B)  the economy is normally operating below the natural rate of unemployment. 
C)  unexpected changes in monetary policy are the major source of fluctuations in real GDP. 
D)  the economy is normally at potential GDP. 
A)  the long-run Phillips curve is negatively sloped. 
B)  the economy is normally operating below the natural rate of unemployment. 
C)  unexpected changes in monetary policy are the major source of fluctuations in real GDP. 
D)  the economy is normally at potential GDP.

Question 16

In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was:

Accepted Answer

A)  "My wages usually catch up to rising prices within a year." 
B)  "The price increase will create extra profit for my employer.... There will be no effect on my pay." 
C)  "My wages have always increased by more than the rate of inflation." 
D)  None of the above is correct. 
A)  "My wages usually catch up to rising prices within a year." 
B)  "The price increase will create extra profit for my employer.... There will be no effect on my pay." 
C)  "My wages have always increased by more than the rate of inflation." 
D)  None of the above is correct.

Question 17

The curve showing the short-run relationship between the ________ and the ________ is called the Phillips curve.

Accepted Answer

A)  nominal interest rate; real interest rate 
B)  unemployment rate; inflation rate 
C)  price level; real GDP 
D)  exchange rate; real interest rate 
A)  nominal interest rate; real interest rate 
B)  unemployment rate; inflation rate 
C)  price level; real GDP 
D)  exchange rate; real interest rate

Question 18

When unemployment is above its natural rate, the inflation rate will eventually

Accepted Answer

A)  increase. 
B)  decrease. 
C)  move to its natural rate. 
D)  become equal to the natural rate of unemployment. 
A)  increase. 
B)  decrease. 
C)  move to its natural rate. 
D)  become equal to the natural rate of unemployment.

Question 19

An increase in the level of structural unemployment will shift the long-run Phillips curve.

Accepted Answer

A) True 
 B)False

Question 20

A decrease in cyclical unemployment will

Accepted Answer

A)  shift the long-run Phillips curve to the left. 
B)  decrease the natural rate of unemployment. 
C)  shift the short-run Phillips curve to the left. 
D)  All of the above are correct. 
E)  None of the above is correct. 
A)  shift the long-run Phillips curve to the left. 
B)  decrease the natural rate of unemployment. 
C)  shift the short-run Phillips curve to the left. 
D)  All of the above are correct. 
E)  None of the above is correct.

Exam 28: Inflation, Unemployment, and Federal Reserve Policy

One problem with deflation is that it can raise the real value of debt.

Evidence shows that many people who delay searching for a job for a year or longer after they are laid off

Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?

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

If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

A falling price level is called ________ and a fall in the rate of inflation is called ________.

Figure 28-1 -Refer to Figure 28-1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point C in the long run?

In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.

If the economy is producing ________, unemployment is at its natural rate.

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 C, which of the following must be true?

According to real business cycle models,

In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was:

The curve showing the short-run relationship between the ________ and the ________ is called the Phillips curve.

When unemployment is above its natural rate, the inflation rate will eventually

An increase in the level of structural unemployment will shift the long-run Phillips curve.

A decrease in cyclical unemployment will

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

A falling price level is called and a fall in the rate of inflation is called .

In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in and .

The curve showing the short-run relationship between the and the is called the Phillips curve.