Exam 16: The Dynamics of Inflation and Unemployment

Recall the Application about the increase in political independence for the Bank of England and its effect on anticipated inflation to answer the following question(s). In 1997, the Bank of England became more independent from the government. Although the government still retained the authority to set overall policy goals, the Bank of England was free to pursue its policy goals without direct political control. Federal Reserve economist Mark Spiegel compared interest rates on two different types of long-term bonds, those that are automatically adjusted for inflation and those that are not, to see how the British bond market reacted to this policy change. -In this Application, according to some economists, the move toward more political independence for the Bank of England would tend to

As the result of unanticipated inflation, borrowers are better off while lenders are worse off if the actual inflation rate

Suppose that for a given year money growth is 12 percent, real GDP growth is 3 percent, and velocity growth is 2 percent. According to the growth version of the quantity equation, the inflation rate would be

Explain the rational expectations theory of inflation.

The difference between the Phillips curve and the expectations Phillips curve is that the

Rational expectations of inflation means that when decisions are made regarding inflation, people use information rather than making assumptions that inflation will rise or decline in the future.

If the growth rate of money is 7 percent, the growth rate of prices is 4 percent, and velocity is not changing, what is the growth rate of output in an economy?

To stop hyperinflations, a nation must

Increases in unanticipated inflation will impact employment levels and would therefore tend to cause

Suppose the public expects a 4 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that

Suppose that the expected inflation rate is 8 percent and the actual inflation rate is 8 percent. Then borrowers

Suppose that union leaders negotiate a significant increase in nominal wages. If the Federal Reserve holds the growth in the money supply constant, in the short run the aggregate supply curve will shift

If the growth rate of money changes, there will be no long-run effects on real interest rates.

Monetarists

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will cause

Define "money illusion" and explain its cause.

Velocity of money =

All else equal, expectations of higher inflation will affect the amount of money people are holding because they will need more cash to pay for goods and services.

A tight-money policy in the short run typically leads to

According to the expectations Phillips curve, unemployment varies with