Exam 16: The Dynamics of Inflation and Unemployment

The wage rate that is adjusted for changes in the price level over time is called the:

Which of the following contributed to the rise in the natural rate of unemployment in Europe?

If prices increase by 8 percent and wages increase by 6 percent, the:

If labor union leaders believe that the Fed is more inclined to fight unemployment than keep inflation in check, then they are more likely to:

The group of economists who emphasize the role that the money supply plays in determining nominal income and inflation are called:

According to the growth version of the quantity equation, if the money supply increases by 10 percent while velocity stays constant and real GDP increased by 12 percent, then:

Hyperinflations in history were never caused by the government printing money to finance government expenditures.

Hyperinflation occurs because of:

High money supply growth is generally the cause of hyperinflation.

Inflation cannot continue indefinitely without increases in the money supply.

An increase in the money supply, holding all else constant will cause:

When the Fed randomly increases the money supply at a lower rate than what is expected by the public,:

Herbert Simon believed that the public uses rules of thumbs to predict inflation in the future because:

The data for the U.S. shows that the velocity of money is constant.

INFLATION-INDEXED BONDS IN THE UNITED STATES Are there bonds that can protect your investments from inflation? In 1997, the U.S. Department of the Treasury created a new financial instrument called the Treasury Inflation-Protected Security, or TIPS. The key feature of TIPS is that the payments to investors adjust automatically to compensate for the actual changes in the Consumer Price Index. Therefore, TIPS provide protection to investors from inflation. Like other government bonds, TIPS make interest payments every six months and a payment of the original principal when the bond matures. However, unlike other Treasury bonds, these payments are automatically adjusted for changes in inflation. Despite their obvious attractions, the market for TIPS is still rather small. As of 2005, there were about $200 billion in TIPS outstanding, compared to a total volume of about $4 trillion ($4,000 billion) total Treasury obligations. Because TIPS compensate for actual inflation, the interest rate on these bonds differs from conventional bonds by the expected inflation rate. By comparing the interest rates on TIPS to other government bonds of similar maturity, economists can estimate the public’s expectations of inflation. -Because of the attractiveness of TIPS over conventional securities, the volume of TIPS transacted in the market in 2005 was larger than the volume of conventional (non- inflation indexed) securities.

An increase in inflationary expectations that causes an increase in the growth rate of firms' prices shifts the:

The velocity of money is the ratio of real GDP to the money supply.

Among developed countries during 1955- 1988, the central banks of Germany and Switzerland were the most successful in controlling inflation.

According to the quantity equation, an increase in the velocity of money, all else fixed, will tend to cause:

Recall Application 3, "Hyperinflation in Zimbabwe," to answer the following questions: -Using what you learned from the quantity theory of money, what is the main cause for the hyperinflation in Zimbabwe?