Exam 16: The Dynamics of Inflation and Unemployment

Nations that are unable to borrow money to pay for budget deficits often resort to

In the long run, increases in the growth rate of the money supply will ________ nominal rates of interest and ________ real rates of interest.

If the rate of unemployment is equal to the natural rate, the rate of inflation will

Which of the following is an example of an expectation of inflation?

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. -The heads of central banks tend to be conservative, preferring to risk increasing unemployment instead of risking an increase in inflation.

As the result of unanticipated inflation, firms are better off while workers are worse off if the actual inflation rate

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________.

Suppose that for a given year money growth is 12 percent, real GDP growth is 4 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be

Recall the Application about how to estimate the shifts in the natural rate of unemployment to answer the following question(s). -If the natural rate of unemployment was 5 percent and inflation was 3 percent, the inflation rate will rise if the unemployment rate for the next two years rose to 8 percent.

Describe briefly the relationship between unanticipated inflation and unemployment.

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. The Federal Reserve decides to keep the money growth rate at 7 percent. In the short run, we expect that

Define a hyperinflation and explain what causes it.

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases relative to the expected rate, the unemployment rate

What would happen to prices if, for example, all trade unions negotiated long-term higher nominal pay and regular across-the-board increases for workers?

Suppose the inflation rate is 6 percent this year. If nominal wages increase by 6 percent, real wages will

Compared to other countries, inflation in the United States has been

Suppose the inflation rate is 3 percent this year. If nominal wages increase by 5 percent, real wages will

If the public forms their expectations rationally, a credible central bank will

If nominal GDP is $16 trillion and the money supply is $4 trillion, then the velocity of money is

The natural rate of unemployment does not change over time.