Question 1

If inflationary expectations on the part of the public increase,the trade-off between inflation and unemployment becomes worse.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Even if expectations of inflation are rational,sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 4

If actual inflation is less than expected inflation,which of the following will be true?

Accepted Answer

A) Real wages will rise. 
B) Real wages will fall. 
C) The Phillips curve will be a vertical line. 
D) The unemployment rate will fall.

Question 5

According to the ________ Phillips curve,the unemployment rate and the inflation rate are negatively related.

Accepted Answer

A) long-run 
B) short-run 
C) long-run and short-run 
D) rational expectations

Question 6

________ would be the source of a "real" business cycle.

Accepted Answer

A) Technology shocks 
B) Anticipated changes in monetary policy 
C) Unanticipated changes in monetary policy 
D) all of the above

Question 7

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008.Which of the following was one of those actions?

Accepted Answer

A) decreasing the money supply to fight the possibility of disinflation 
B) the decision to keep the federal funds rate at 1 percent from June 2003 to June 2004 
C) working in concert with the European Central Bank to stabilize the dollar / euro exchange rate 
D) financing the first Gulf War by printing money and generating rapid inflation

Question 8

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008.Which of the following was one of those actions?

Accepted Answer

A) decreasing the money supply to fight the possibility of disinflation 
B) the decision during 1998 to help save the hedge fund Long Term Capital Management 
C) working in concert with the European Central Bank to stabilize the dollar / euro exchange rate 
D) financing the war in Afghanistan by printing money and generating rapid inflation

Question 9

If the Fed chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the White House,this would be an indication of the Fed's

Accepted Answer

A) lack of credibility. 
B) independence. 
C) changing its monetary policy target. 
D) frictional relationship with the White House.

Question 10

Empirical evidence shows that the short-run Phillips curve was vertical during the 1950s and 1960s.

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

According to the short-run Phillips curve,which of the following would result in low rates of unemployment?

Accepted Answer

A) weak increases in aggregate supply 
B) a lower inflation rate 
C) weak increases in aggregate demand 
D) a higher inflation rate

Question 13

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 14

In the 1960s,many economists and policymakers believed the trade-off between inflation and unemployment was permanent.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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

Question 16

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.

Accepted Answer

A) 1930s 
B) 1940s 
C) 1950s 
D) 1960s

Question 17

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 18

During a time when the inflation rate is increasing each year for a number of years,are adaptive expectations or rational expectations likely to give the more accurate forecasts? Briefly explain.

Accepted Answer

The answer of During a time when the inflation rate...

Question 19

When individuals use all available information about an economic variable to make a decision,expectations are

Accepted Answer

A) underestimates of reality. 
B) accurate. 
C) rational. 
D) overestimates of reality.

Question 20

Figure 17-9 
-Refer to Figure 17-9.A supply shock,such as rising oil prices,would be depicted as a movement from

Accepted Answer

A) A to D to C. 
B) C to B to A. 
C) C to D to A. 
D) C to E to B. 
E) A to B to C.

Exam 17: Inflation, unemployment, and Federal Reserve Policy

If inflationary expectations on the part of the public increase,the trade-off between inflation and unemployment becomes worse.

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?

Even if expectations of inflation are rational,sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment.

If actual inflation is less than expected inflation,which of the following will be true?

According to the ________ Phillips curve,the unemployment rate and the inflation rate are negatively related.

________ would be the source of a "real" business cycle.

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008.Which of the following was one of those actions?

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008.Which of the following was one of those actions?

If the Fed chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the White House,this would be an indication of the Fed's

Empirical evidence shows that the short-run Phillips curve was vertical during the 1950s and 1960s.

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

According to the short-run Phillips curve,which of the following would result in low rates of unemployment?

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.

In the 1960s,many economists and policymakers believed the trade-off between inflation and unemployment was permanent.

If workers and firms know that the Federal Reserve is following an expansionary monetary policy,workers and firms will expect inflation to and will adjust wages so that the real wage .

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.

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.

During a time when the inflation rate is increasing each year for a number of years,are adaptive expectations or rational expectations likely to give the more accurate forecasts? Briefly explain.

When individuals use all available information about an economic variable to make a decision,expectations are

Figure 17-9 -Refer to Figure 17-9.A supply shock,such as rising oil prices,would be depicted as a movement from