Exam 16: The Dynamics of Inflation and Unemployment

During hyperinflation, the value of money drops so quickly that people would not want to hold money balances for very long. This will cause:

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

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. SOURCE: Simon Kwan, "Inflation Expectations: How the Market Speaks," Federal Reserve Bank of San Francisco Economic Letter, October 7, 2005. -According to the application, an investor would find TIPS most advantageous if:

Which of the following contributed to the increase in the unemployment rate in 1983?

The velocity of money can be expressed as:

Hyperinflation is caused by an increase in the velocity of money.

Which of the following will shift the natural rate of unemployment?

If a central bank is not credible in its task of fighting inflation, private expectations of higher inflation will likely develop.

In the long run, the real interest rate depends primarily on the growth rate of the money supply.

The expectations Phillips curve shows the inverse relationship between inflation and unemployment when:

Jim's nominal wage increased by 3%, and the prices of goods that Jim buys increased by 2%. Jim's real wage has:

During 1989, prices were increasing by approximately 302,200% a year in Argentina. This is an example of a:

The Phillips curve shows the _______ relationship between inflation and _______ .

According to the quantity equation, money times the velocity of money equals real GDP.

If the actual unemployment rate is below the natural rate, we would expect that:

Which of the following did not contribute to higher inflation in the late 1970s?

Money supply growth that causes hyperinflation is in turn, caused by:

Real wages increase only when nominal wages increase.

Recall Application 2, "Increased Political Independence for the Bank of England Lowered Inflation Expectations," to answer the following questions: -According to the application, independence from political influence reinforces central bank credibility because:

According to the growth version of the quantity equation, a 4% increase in the money supply, holding velocity constant, causes a 4% increase in: