Question 1

Expansionary monetary policy will result in

Accepted Answer

A)  lower interest rates. 
B)  decreased rates of inflation. 
C)  a decrease in aggregate demand. 
D)  All of the above are correct.

Question 2

Figure 28-1
 
-Assume weak growth in aggregate demand keeps the economy below potential GDP,so unemployment rises but inflation falls.This explains the ________ slope of the short-run Phillips curve.

Accepted Answer

A)  positive 
B)  negative 
C)  zero 
D)  infinite

Question 3

Use the following information to draw a graph showing the short-run and long-run Phillips curves,and be sure your graph shows the point where the short-run and long-run Phillips curves intersect.
Natural rate of unemployment = 4 percent
Current rate of unemployment = 5 percent
Expected inflation rate = 3 percent
Current inflation rate = 2 percent

Accepted Answer

The answer of Use the following information to draw a...

Question 4

What action should the Fed take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation?

Accepted Answer

The answer of What action should the Fed take if...

Question 5

The price level in the economy between 2010 and 2011 rose from 100 to 110.Between 2011 and 2012,the price level rose from 110 to 121.How does the short-run Phillips curve predict the unemployment rate will change as a result?

Accepted Answer

A)  The unemployment rate will decrease since inflation decreased. 
B)  The unemployment rate will decrease since inflation increased. 
C)  The unemployment rate will increase since inflation increased. 
D)  The unemployment rate will not change since there is no change in the rate of inflation.

Question 6

Figure 28-5
 
-Refer to Figure 28-5.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

Question 7

Figure 28-4
 
-Monetary policy has ________ impact on the long-run Phillips curve.

Accepted Answer

A)  a positive 
B)  a negative 
C)  an unpredictable 
D)  no

Question 8

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?

Accepted Answer

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

Question 9

Ceteris paribus,in the short run following an increase in the rate of growth in Aggregate Demand,we would expect to see an increase in the rate of inflation and an increase in the rate of unemployment.

Accepted Answer

A) True 
 B)False

Question 10

If the Fed attempts to reach and maintain very low rates of unemployment,we would expect the rate of inflation to rise.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  structural 
B)  frictional 
C)  cyclical 
D)  dynamic

Question 12

The "rational expectations" school of economists,including Robert Lucas and Thomas Sargent,argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.

Accepted Answer

A) True 
 B)False

Question 13

Figure 28-6
 
-Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called

Accepted Answer

A)  nonmonetary business cycle models. 
B)  real business cycle models. 
C)  rational expectations models. 
D)  short-run macroeconomic models.

Question 14

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

Accepted Answer

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

Question 15

In the 1960s,many economists and policy makers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________,who argued that there is no trade-off between inflation and unemployment and the long run.

Accepted Answer

A)  Robert Lucas and Thomas Sargent 
B)  Finn Kydland and Edward Prescott 
C)  Paul Samuelson and James Tobin 
D)  Milton Friedman and Edmund Phelps

Question 16

If changes in inflation are higher than expected,

Accepted Answer

A)  the short-run Phillips curve will be positively sloped, but not vertical. 
B)  the short-run Phillips curve will be negatively sloped. 
C)  the short-run Phillips curve will be vertical. 
D)  the long-run Phillips curve will be negative sloped.

Question 17

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with ________ had lower inflation rates than countries with ________.

Accepted Answer

A)  low rates of unemployment; high rates of unemployment 
B)  a large government debt; little to no government debt 
C)  no private banking system; an independent banking system 
D)  highly independent central banks; central banks that have little independence

Question 18

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 = 7%.
The natural rate of unemployment = 5.5%.
Last year's inflation rate = 5%.
This year's inflation rate = 4%.

Accepted Answer

The answer of Use the information below to explain adjustments...

Question 19

Figure 28-7
 
-Refer to Figure 28-7. A(n)________ would be depicted as a movement from A to D to C .

Accepted Answer

A)  supply shock, such as rising oil prices, 
B)  increase in aggregate demand 
C)  implementation of contractionary monetary policy 
D)  increase in short-run aggregate supply

Question 20

What is the natural rate of unemployment?

Accepted Answer

A)  the unemployment rate that exists when the economy is at potential GDP 
B)  the unemployment rate that exists when the economy is at a trough in a business cycle 
C)  an unemployment rate of 0% 
D)  any unemployment rate that is above the inflation rate

Exam 17: Inflation, unemployment, and Federal Reserve Policy

Expansionary monetary policy will result in

Figure 28-1 -Assume weak growth in aggregate demand keeps the economy below potential GDP,so unemployment rises but inflation falls.This explains the ________ slope of the short-run Phillips curve.

What action should the Fed take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation?

The price level in the economy between 2010 and 2011 rose from 100 to 110.Between 2011 and 2012,the price level rose from 110 to 121.How does the short-run Phillips curve predict the unemployment rate will change as a result?

Figure 28-4 -Monetary policy has ________ impact on the long-run Phillips curve.

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?

Ceteris paribus,in the short run following an increase in the rate of growth in Aggregate Demand,we would expect to see an increase in the rate of inflation and an increase in the rate of unemployment.

If the Fed attempts to reach and maintain very low rates of unemployment,we would expect the rate of inflation to rise.

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

The "rational expectations" school of economists,including Robert Lucas and Thomas Sargent,argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.

Figure 28-6 -Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called

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

In the 1960s,many economists and policy makers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________,who argued that there is no trade-off between inflation and unemployment and the long run.

If changes in inflation are higher than expected,

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with had lower inflation rates than countries with .

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 = 7%. The natural rate of unemployment = 5.5%. Last year's inflation rate = 5%. This year's inflation rate = 4%.

Figure 28-7 -Refer to Figure 28-7. A(n) ________ would be depicted as a movement from A to D to C .

What is the natural rate of unemployment?