Exam 17: Inflation,unemployment,and Federal Reserve Policy

A decrease in expected inflation will

If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation,which of the following would you expect to see?

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.

If actual inflation is less than expected inflation,actual real wages will be ________ expected real wages and unemployment will ________.

Figure 17-1 -Refer to Figure 17-1.Suppose that the economy is currently at point A.If the Federal Reserve engaged in contractionary monetary policy,where would the economy end up in the short run?

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

Figure 17-1 -Refer to Figure 17-1.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?

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

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

The short-run Phillips curve will not shift unless there is

Refer to the Article Summary.Senator Pat Toomey brought the Fed's credibility into question when it once again delayed raising interest rates despite several prior announcements alluding to timing for a potential interest rate hike.Prior to this,over the past two decades whenever a change in Fed policy had been announced,the change has ________ taken place,leading to ________ credibility.

The short-run Phillips curve will shift if there is

Use the information below to explain adjustments that move the economy to a long-run equilibrium.Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 6%. Last year's inflation rate = 3%. This year's inflation rate = 4%.

Figure 17-2 -Refer to Figure 17-2.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?

What is the NAIRU?

If expectations are adaptive,how will the economy adjust to a new long-run equilibrium in response to expansionary monetary policy? Support your answer with a graph of the Phillips curve.

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 decade of the ________,A.W.Phillips plotted data for Great Britain which revealed a relationship between rates of changes in wages versus unemployment rates.Economists later discovered other "Phillips Curve" relationships between rates of inflation versus unemployment rates.

If strong aggregate demand is pushing the economy beyond potential real GDP,which of the following must be true?

According to real business cycle models,