Question 1

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

Accepted Answer

A)  increasing the target interest rate on overnight loans 
B)  using expansionary monetary policy to drive down interest rates 
C)  consistently pursuing policy to promote the credibility of the central bank 
D)  explicitly and credibly targeting inflation 
A)  increasing the target interest rate on overnight loans 
B)  using expansionary monetary policy to drive down interest rates 
C)  consistently pursuing policy to promote the credibility of the central bank 
D)  explicitly and credibly targeting inflation

Question 2

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 3

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 4

What is a "structural" relationship?

Accepted Answer

A)  a relationship that depends on the size of firm investments in capital such as buildings and other structures 
B)  a relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods 
C)  a relationship between any two variables that is temporary 
D)  any relationship that cannot be anticipated 
A)  a relationship that depends on the size of firm investments in capital such as buildings and other structures 
B)  a relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods 
C)  a relationship between any two variables that is temporary 
D)  any relationship that cannot be anticipated

Question 5

Figure 28-2  
-Refer to Figure 28-2.Suppose the economy is at point A in the figure above.Which of the following is true?

Accepted Answer

A)  The expected rate of inflation is 5.5%. 
B)  The current unemployment rate is equal to the natural rate of unemployment. 
C)  The current unemployment rate is 3.8%. 
D)  Actual inflation is 1%. 
E)  The economy will move from A to B. 
A)  The expected rate of inflation is 5.5%. 
B)  The current unemployment rate is equal to the natural rate of unemployment. 
C)  The current unemployment rate is 3.8%. 
D)  Actual inflation is 1%. 
E)  The economy will move from A to B.

Question 6

In the long run,the Phillips curve is a ________ at ________.

Accepted Answer

A)  horizontal line; 0% inflation 
B)  negatively sloped line; the intersection of aggregate demand and short-run aggregate supply 
C)  vertical line; the natural rate of unemployment 
D)  vertical line; the expected rate of inflation 
A)  horizontal line; 0% inflation 
B)  negatively sloped line; the intersection of aggregate demand and short-run aggregate supply 
C)  vertical line; the natural rate of unemployment 
D)  vertical line; the expected rate of inflation

Question 7

Some economists and lawmakers believe the Fed lost some of its independence when it

Accepted Answer

A)  began printing money at the directive of the White House prior to the 2008 presidential election. 
B)  began working closely with the Treasury Department while dealing with the financial crisis of 2008. 
C)  embarked on an expansionary monetary policy during the recession of 2007-2009. 
D)  began using the federal funds rate instead of M1 and M2 as a monetary policy target. 
A)  began printing money at the directive of the White House prior to the 2008 presidential election. 
B)  began working closely with the Treasury Department while dealing with the financial crisis of 2008. 
C)  embarked on an expansionary monetary policy during the recession of 2007-2009. 
D)  began using the federal funds rate instead of M1 and M2 as a monetary policy target.

Question 8

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

Accepted Answer

A)  when inflation is high and unstable 
B)  when inflation is low 
C)  when inflation is moderate but stable 
D)  when inflation is high and stable 
A)  when inflation is high and unstable 
B)  when inflation is low 
C)  when inflation is moderate but stable 
D)  when inflation is high and stable

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

An increase in the expected inflation rate will

Accepted Answer

A)  shift the short-run Phillips curve to the right. 
B)  shift the short-run Phillips curve to the left. 
C)  reduce the inflation rate. 
D)  reduce the unemployment rate. 
A)  shift the short-run Phillips curve to the right. 
B)  shift the short-run Phillips curve to the left. 
C)  reduce the inflation rate. 
D)  reduce the unemployment rate.

Question 11

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

Accepted Answer

To reduce inflation,the Federal Reserve

Question 12

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 13

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 14

Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived.

Accepted Answer

The short-run Phillips curve has a negat

Question 15

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?

Accepted Answer

A)  Unemployment of university employees will rise. 
B)  Real wages for university employees will fall. 
C)  Inflation will be 5 percent the following year. 
D)  The increase in inflation is expected. 
A)  Unemployment of university employees will rise. 
B)  Real wages for university employees will fall. 
C)  Inflation will be 5 percent the following year. 
D)  The increase in inflation is expected.

Question 16

If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent,how do you expect workers and firms to react?

Accepted Answer

A)  As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. 
B)  As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation. 
C)  If the Fed's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation. 
D)  Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of Fed's policy announcement. 
A)  As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. 
B)  As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation. 
C)  If the Fed's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation. 
D)  Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of Fed's policy announcement.

Question 17

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 18

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

Accepted Answer

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

Question 19

If unemployment persists for a long period of time,the natural rate of unemployment rises.

Accepted Answer

A) True 
 B)False

Question 20

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by

Accepted Answer

A)  workers and firms using Fed policy to predict inflation. 
B)  workers and firms using all the information available to predict inflation. 
C)  workers and firms rapidly adjusting wages and prices in response to changes in expectations. 
D)  workers and firms being fooled by unexpected changes in monetary policy. 
A)  workers and firms using Fed policy to predict inflation. 
B)  workers and firms using all the information available to predict inflation. 
C)  workers and firms rapidly adjusting wages and prices in response to changes in expectations. 
D)  workers and firms being fooled by unexpected changes in monetary policy.

Exam 28: 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?

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

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?

What is a "structural" relationship?

Figure 28-2 -Refer to Figure 28-2.Suppose the economy is at point A in the figure above.Which of the following is true?

In the long run,the Phillips curve is a ________ at ________.

Some economists and lawmakers believe the Fed lost some of its independence when it

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

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

An increase in the expected inflation rate will

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

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?

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

Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived.

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?

If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent,how do you expect workers and firms to react?

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?

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

If unemployment persists for a long period of time,the natural rate of unemployment rises.

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by

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

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

In the long run,the Phillips curve is a at .