Question 1

In conducting monetary policy, how has the Federal Reserve enhanced its credibility?

Accepted Answer

A)   by not following through with changes it has announced
B)   by revealing the Fed's target for the federal funds rate
C)   by keeping the minutes of the open market committee meetings confidential
D)   by marketing and increased expenditure on advertising B

Question 2

The price level in the economy between 2012 and 2013 rose from 100 to 110. Between 2013 and 2014, 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. D

Question 3

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

Accepted Answer

A)   The expected rate of inflation is 3%.
B)   The natural rate of unemployment is 3.8%.
C)   The current unemployment rate is 5%.
D)   The economy is producing at potential GDP.
E)   Expected inflation and actual inflation are the same. A

Question 4

Under Alan Greenspan, the Fed strived to hit its goals of price stability and high employment through

Accepted Answer

A)   setting targets for the federal funds rate of interest.
B)   setting targets for rates of growth in the M1 and M2 money supplies.
C)   practicing discretionary monetary policy, reacting to counter-changes in the level of unemployment during recessions and booms.
D)   strict adherence to rules based strategies.

Question 5

One criticism of the Fed's quantitative easing policy is that a prolonged period of low interest rates could lead to speculative bubbles. Some economists argued that as interest rates fell and prices of long-term Treasury bonds rose, financial markets were experiencing a "Treasury bubble." These economists worried that investors, banks, other financial firms, and pension funds were underestimating the likelihood that long-term interest rates would eventually ________, causing substantial ________ in the prices of Treasury bonds.

Accepted Answer

A)   rise; declines
B)   rise; increases
C)   fall; declines
D)   fall; increases

Question 6

The ________ curves are both vertical.

Accepted Answer

A)   aggregate demand and short-run Phillips
B)   long-run aggregate supply and short-run Phillips
C)   long-run aggregate supply and long-run Phillips
D)   short-run aggregate supply and short-run Phillips

Question 7

What impact does monetary policy have on the long-run Phillips curve?

Accepted Answer

A)   Monetary policy can only shift the long-run Phillips curve to the left.
B)   Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is expansionary or contractionary.
C)   Monetary policy can only shift the long-run Phillips curve to the right.
D)   Monetary policy has no impact on the long-run Phillips curve.

Question 8

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following?

Accepted Answer

A)   an increase in the unemployment rate to 3.4%
B)   a decrease in the unemployment rate to 3.0%
C)   a decrease in the demand for labor in the economy
D)   a return to the original inflation rate of 1.3%

Question 9

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 10

An increase in frictional unemployment will

Accepted Answer

A)   shift the long-run Phillips curve to the right.
B)   increase the natural rate of unemployment.
C)   shift the short-run Phillips curve to the right.
D)   All of the above are correct.
E)   None of the above is correct.

Question 11

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.

Question 12

If workers and firms raise their inflation expectations,

Accepted Answer

A)   unemployment will fall.
B)   actual inflation will fall to match expected inflation.
C)   the short-run Phillips curve will be vertical.
D)   the short-run Phillips curve will shift upward.

Question 13

All other factors held constant, increased growth in aggregate demand will

Accepted Answer

A)   increase inflation.
B)   reduce unemployment.
C)   move the economy to a higher point on the short-run Phillips curve.
D)   All of the above are correct.

Question 14

Proponents of the new classical macroeconomics do not believe which of the following?

Accepted Answer

A)   Expansionary monetary policy can be an effective policy tool.
B)   Workers and firms use information contained in Fed policy to form inflation expectations.
C)   Wages and prices will adjust rapidly in the economy.
D)   The economy will normally be at its potential level.

Question 15

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 16

If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve

Accepted Answer

A)   expansionary monetary policy is especially effective.
B)   expansionary monetary policy is ineffective.
C)   expansionary monetary policy is effective in the short run, but not the long run.
D)   expansionary monetary policy is effective in the short run and the long run.

Question 17

If actual inflation is greater than expected inflation,

Accepted Answer

A)   real wages rise.
B)   real wages fall.
C)   the Phillips curve is a vertical line.
D)   the unemployment rate rises.

Question 18

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 19

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.

Question 20

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.

Exam 28: Inflation, Unemployment, and Federal Reserve Policy