Question 1

Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers.

Accepted Answer

The answer of Workers at a local construction company are...

Question 2

The experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers may have

Accepted Answer

A)  had adaptive expectations. 
B)  had rational expectations but didn't trust Fed announcements. 
C)  preferred high unemployment to high inflation. 
D)  Both A and B are correct answers.

Question 3

Shondra's real wage in 2014 is $18.50. If the price level is 106, what is Shondra's nominal wage?

Accepted Answer

A)  $19.61 
B)  $18.61 
C)  $18.50 
D)  $17.44

Question 4

If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve, the short-run Phillips curve will be

Accepted Answer

A)  negatively sloped. 
B)  positively sloped. 
C)  vertical. 
D)  flatter in the long run than it is in the short run.

Question 5

Which of the following best explains the negative slope of the short-run Phillips curve?

Accepted Answer

A)  Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. 
B)  Aggregate demand grows so quickly that the inflation rate rises as unemployment rises. 
C)  Long-run aggregate supply increases quickly enough that inflation falls as unemployment also falls. 
D)  Short-run aggregate supply increases at the same pace as aggregate demand increases so that inflation and unemployment do not change.

Question 6

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

Accepted Answer

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

Question 7

According to the short-run Phillips curve, the unemployment rate and the inflation rate are

Accepted Answer

A)  unrelated. 
B)  positively related. 
C)  negatively related. 
D)  unaffected by monetary policy.

Question 8

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 4 percent over the next year, which of the following will occur?

Accepted Answer

A)  Unemployment of university employees will fall. 
B)  Real wages for university employees will rise. 
C)  Inflation will be 5 percent the following year. 
D)  The decrease in inflation is expected.

Question 9

Which of the following would be the source of a "real" business cycle?

Accepted Answer

A)  changes in technology 
B)  anticipated expansionary monetary policy 
C)  unanticipated expansionary monetary policy 
D)  unanticipated contractionary monetary policy

Question 10

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

Accepted Answer

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

Question 11

Some economists and lawmakers believe the Fed lost some of its independence when it

Accepted Answer

A)  began printing money at the directive of the White House prior to the 2008 presidential election. 
B)  began working closely with the Treasury Department while dealing with the financial crisis of 2008. 
C)  embarked on an expansionary monetary policy during the recession of 2007-2009. 
D)  began using the federal funds rate instead of M1 and M2 as a monetary policy target.

Question 12

Figure 28-2 
-Refer to Figure 28-2. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be 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 economy will move from C to A. 
D)  Workers and firms expect inflation to be 1%. 
E)  The natural rate of unemployment is 6%.

Question 13

Contractionary monetary policy will result in

Accepted Answer

A)  higher interest rates. 
B)  increased rates of inflation. 
C)  an upward shift in the short-run Phillips curve. 
D)  a leftward shift in the long-run Phillips curve.

Question 14

If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see?

Accepted Answer

A)  a downward shift of the short-run Phillips curve 
B)  a reduction in the unemployment rate 
C)  a decrease in the long-run aggregate supply curve 
D)  an increase in inflationary expectations

Question 15

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 will follow deflationary monetary policies. 
B)  The Fed will follow inflationary monetary policies. 
C)  The rate of inflation will fall as Fed tries to reduce the unemployment rate. 
D)  The Fed will reduce the natural rate of unemployment.

Question 16

The actual real wage is lower than the expected real wage if

Accepted Answer

A)  actual inflation is less than expected inflation. 
B)  expected inflation is less than actual inflation. 
C)  actual unemployment is less than expected unemployment. 
D)  actual unemployment is less than actual inflation.

Question 17

Where does the short-run Phillips curve intersect the long-run Phillips curve?

Accepted Answer

A)  at the point where the rate of inflation and the unemployment rate are equal 
B)  at the natural rate of inflation 
C)  at the point where actual inflation is equal to expected inflation 
D)  There is no intersection between the short-run and long-run Phillips curves.

Question 18

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 19

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 20

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

Exam 28: Inflation, Unemployment, and Federal Reserve Policy