Question 1

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." C

Question 2

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. C

Question 3

If firms and workers have adaptive expectations,what impact will expansionary monetary policy have on inflation,unemployment,and the Phillips curve?

Accepted Answer

Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period.If the Federal Reserve follows an expansionary monetary policy,inflation will rise.If expectations about inflation are adaptive,the expansionary monetary policy will increase actual inflation above expected inflation.With no adjustment in nominal wages,the real wage will fall,and the unemployment rate will be pushed below its natural rate.In other words,the inflation rate and the unemployment rate will be negatively related,as indicated by a short-run Phillips curve.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

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.

Question 8

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 9

A falling price level is called ________ and a fall in the rate of inflation is called ________.

Accepted Answer

A)   disinflation; a contraction
B)   a contraction; disinflation
C)   disinflation; deflation
D)   deflation; disinflation

Question 10

Figure 28-2 
-Refer to Figure 28-2.Suppose the economy is at point A in the figure above.Which of the following is 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 long-run Phillips curve will shift to the left.
D)   Actual inflation and expected inflation are the same.
E)   The long-run Phillips curve will shift to the right.

Question 11

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 12

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 13

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 = 4%.
The natural rate of unemployment = 6%.
Last year's inflation rate = 3%.
This year's inflation rate = 4%.

Accepted Answer

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

Question 14

If expected inflation rises,the long-run Phillips curve will

Accepted Answer

A)   shift to the right.
B)   not be affected.
C)   shift to the left.
D)   become negatively sloped.

Question 15

If the economy experiences a negative supply shock,which of the following will be true?

Accepted Answer

A)   Inflation will rise, and real GDP will fall.
B)   Inflation will rise, and real GDP will rise.
C)   Inflation will fall, and real GDP will fall.
D)   Inflation will fall, and real GDP will rise.

Question 16

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 17

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 18

Which of the following could increase unemployment and inflation simultaneously?

Accepted Answer

A)   an increase in oil prices
B)   expansionary monetary policy
C)   contractionary monetary policy
D)   a decrease in the real wage

Question 19

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 20

A study conducted by Robert Shiller,a Yale Economist,found that a large majority of the public thinks that increases in inflation will not quickly lead to an increase in wages.

Accepted Answer