Question 1

Figure 28-5 
-Refer to Figure 28-5. Consider the Phillips curves shown in the above graph. We can conclude from this graph that

Accepted Answer

A)  the natural rate of unemployment in this economy is 5.5 percent. 
B)  the expected rate of inflation in this economy is 10 percent. 
C)  ceteris paribus, a fall in the rate of inflation to 5 percent will increase unemployment to 7.5 percent in the short run. 
D)  All of the above are correct.

Question 2

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 3

If the Fed decided to reverse its policy actions implemented during the heart of the recession, the Fed would be acting to try to prevent

Accepted Answer

A)  a decrease in unemployment. 
B)  an increase in unemployment. 
C)  an increase in deflation. 
D)  an increase in inflation.

Question 4

Figure 28-6 
-Refer to Figure 28-6. If firms and workers have rational expectations, an expansionary monetary policy will cause the short-run equilibrium to move from

Accepted Answer

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

Question 5

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 6

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 7

With which of the following statements would a "real business cycle" theorist most closely agree?

Accepted Answer

A)  "Monetary policies have the greatest impact on real GDP when they are anticipated." 
B)  "Expansionary monetary policy allows the central bank to control inflation and unemployment simultaneously." 
C)  "Wages adjust rapidly to changes in inflation as long as expectations are formed rationally." 
D)  "Technological shocks to the economy affect only aggregate demand in the short run."

Question 8

Some economists argue that the short-run Phillips curve is not vertical, and that monetary policy can be effective in the short run. Which one of the following is not one of the reasons for this skepticism?

Accepted Answer

A)  Empirical evidence shows workers and firms have rational expectations. 
B)  Contracts with workers and suppliers may hinder firms' abilities to adjust to price changes. 
C)  Wages and prices may not adjust rapidly enough to keep the short-run Phillips curve vertical. 
D)  Individuals may not be able to use information of Fed Policy to make a reliable forecast of inflation.

Question 9

If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent? Illustrate your answer with a Phillips curve.

Accepted Answer

The answer of If the rate of inflation in the...

Question 10

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

Accepted Answer

A)  The economy is at an equilibrium that is on the long-run aggregate supply curve. 
B)  The economy is at an equilibrium that is on the long-run Phillips curve. 
C)  The economy is at an equilibrium that is not on the long-run Phillips curve. 
D)  Expansionary monetary policies will push the economy back to the long-run Phillips curve.

Question 11

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

Accepted Answer

A)  flatter 
B)  steeper 
C)  less stable 
D)  Both B and C are correct.

Question 12

All of the following have enhanced the Fed's credibility in conducting monetary policy except

Accepted Answer

A)  following through with changes it has announced. 
B)  revealing the Fed's target for the federal funds rate. 
C)  making the minutes of the open market committee meetings public. 
D)  discontinuing the policy of announcing whether it considered the economy to be at greater risk of inflation or recession following each FOMC meeting.

Question 13

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

Accepted Answer

The answer of If expectations are adaptive, how will the...

Question 14

Figure 28-9 
-Refer to Figure 28-9. 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 15

Ceteris paribus, an increase in the current or actual rate of inflation will cause

Accepted Answer

A)  the short-run Phillips curve to shift upward. 
B)  the unemployment rate to decrease (a movement along the short-run Phillips curve). 
C)  the long-run Phillips curve to shift leftward. 
D)  expectations of future inflation rates to be revised downward.

Question 16

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.

Accepted Answer

The answer of If expectations are adaptive, how will the...

Question 17

In which of the following situations might you expect expansionary monetary policy to reduce the unemployment rate?

Accepted Answer

A)  if expectations are rational 
B)  if changes in monetary policy are unanticipated 
C)  if actual inflation is higher than expected 
D)  if actual inflation is lower than expected

Question 18

Why is the credibility of the Fed's policy announcements particularly important?

Accepted Answer

The answer of Why is the credibility of the Fed's...

Question 19

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 20

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

Exam 28: Inflation, Unemployment, and Federal Reserve Policy

Figure 28-5 -Refer to Figure 28-5. Consider the Phillips curves shown in the above graph. We can conclude from this graph that