Question 1

Figure 28-2 
-Refer to Figure 28-2. Suppose the Fed used expansionary policy to push short-run equilibrium to point B. If the short-run equilibrium remained at point B long enough

Accepted Answer

A)  the short-run Phillips curve would shift up. 
B)  the short-run Phillips curve would shift down. 
C)  the economy would move back to point A. 
D)  the economy would stay at point B in the long run.

Question 2

In the long run, the Federal Reserve can control which of the following?

Accepted Answer

A)  the inflation rate 
B)  the unemployment rate 
C)  the growth rate of real GDP in the economy 
D)  the natural rate of unemployment

Question 3

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

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

Question 5

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had ________ than countries whose central banks had little independence.

Accepted Answer

A)  higher unemployment rates 
B)  lower unemployment rates 
C)  higher inflation rates 
D)  lower inflation rates

Question 6

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 the assumptions of the rational expectations school hold true, and the Fed's announcement is credible, 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

Question 7

If rational workers and firms know that the Federal Reserve is following a contractionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

A)  increase; remains unchanged 
B)  decrease; remains unchanged 
C)  decrease; increases 
D)  increase; decreases

Question 8

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

Question 9

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?

Accepted Answer

The answer of If workers accurately predict the rate of...

Question 10

Suppose a presidential candidate makes a statement in a debate whereby he promises that he would encourage the Fed to permanently lower the unemployment rate to 3%. His opponent claims that this type of policy idea is mired in the 1960s and would only cause inflation. Explain what the opponent means.

Accepted Answer

The answer of Suppose a presidential candidate makes a statement...

Question 11

The unemployment rate that exists when the economy is at potential GDP is called

Accepted Answer

A)  the natural rate of unemployment. 
B)  cyclical unemployment. 
C)  deflation-based unemployment. 
D)  zero-rate unemployment.

Question 12

Figure 28-9 
-Refer to Figure 28-9. A follower of the new classical macroeconomics would argue that ________ like that pursued by Paul Volcker in 1979, would result in a movement from C to A.

Accepted Answer

A)  expansionary monetary policy 
B)  contractionary monetary policy 
C)  expansionary fiscal policy 
D)  contractionary fiscal policy

Question 13

The long-run Phillips curve is ________ than the short-run Phillips curve.

Accepted Answer

A)  flatter 
B)  steeper 
C)  less stable 
D)  more volatile

Question 14

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 short-run Phillips curve will shift to the right. 
B)  The short-run Phillips curve will shift to the left. 
C)  The long-run Phillips curve will shift to the left. 
D)  Actual inflation and expected inflation are the same. 
E)  The long-run Phillips curve will shift to the right.

Question 15

The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________.

Accepted Answer

A)  positively sloped; negatively sloped 
B)  vertical; negatively sloped 
C)  vertical; also vertical 
D)  positively sloped; positively sloped

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.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

If wages and prices adjust rapidly, we would expect expansionary monetary policy to be

Accepted Answer

A)  more likely to reduce the natural rate of unemployment. 
B)  more likely to affect the unemployment rate. 
C)  less likely to affect the unemployment rate. 
D)  less likely to result in a vertical short-run Phillips curve.

Question 19

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

Question 20

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

Accepted Answer

A)  The Fed's policies will be deflationary. 
B)  The Fed's policies will be inflationary. 
C)  The rate of inflation will fall as the Fed tries to reduce the unemployment rate. 
D)  The Fed will reduce the natural rate of unemployment.

Exam 28: Inflation, Unemployment, and Federal Reserve Policy

Figure 28-2 -Refer to Figure 28-2. Suppose the Fed used expansionary policy to push short-run equilibrium to point B. If the short-run equilibrium remained at point B long enough