Deck 17: Inflation, unemployment, and Federal Reserve Policy

Question 1

Employees at the hospital have negotiated a 3 percent increase in wages for the next year,based on their inflation expectations.If inflation is actually 5 percent over the next year,which of the following will occur?

A) Unemployment of hospital employees will rise.
B) Real wages for hospital employees will fall.
C) Inflation will be 3 percent the following year.
D) The increase in inflation is expected.

Answer 1

Real wages for hospital employees will fall.

Question 2

Figure 28-1

According to the short-run Phillips curve,which of the following would result in high rates of unemployment?

A) strong increases in aggregate supply
B) a lower inflation rate
C) strong increases in aggregate demand
D) a higher inflation rate

Answer 2

a lower inflation rate

Question 3

Figure 28-1

According to the short-run Phillips curve,if unemployment is 2.4% and inflation is 3.7%,a decrease in the inflation rate might result in which of the following?

A) an increase in the unemployment rate to 3.4%
B) a decrease in the unemployment rate to 3.0%
C) a decrease in the demand for labor in the economy
D) Both A and C are correct answers.

Answer 3

Both A and C are correct answers.

Question 4

The price level in the economy between 2010 and 2011 rose from 100 to 110.Between 2011 and 2012,the price level rose from 110 to 121.How does the short-run Phillips curve predict the unemployment rate will change as a result?

A) The unemployment rate will decrease since inflation decreased.
B) The unemployment rate will decrease since inflation increased.
C) The unemployment rate will increase since inflation increased.
D) The unemployment rate will not change since there is no change in the rate of inflation.

Question 5

Shondra's real wage in 2012 is $18.50.If the price level is 106,what is Shondra's nominal wage?

A) $19.61
B) $18.61
C) $18.50
D) $17.44

Question 6

Figure 28-1

Refer to Figure 28-1. Suppose that the economy is currently at point A. If the Federal Reserve engaged in expansionary monetary policy,where would the economy end up in the short run?

A) It would remain at point A.
B) point B
C) point C
D) point D
E) point E

Question 7

The curve showing the short-run relationship between ________ and the ________ is called the Phillips curve.

A) nominal interest rate; real interest rate
B) the unemployment rate; the inflation rate
C) price level; real GDP
D) exchange rate; real interest rate

Question 8

Figure 28-1

Refer to Figure 28-1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above,and the unemployment rate at A is the natural rate.If the economy was to move to point B,which of the following must be true?

A) The economy is producing a level of GDP equal to potential GDP.
B) Aggregate demand must have increased.
C) Equilibrium GDP at point B must be below potential GDP.
D) The Fed conducted expansionary policy to cause the move.
E) The Fed purchased treasury bills to cause the move.

Question 9

Figure 28-1

Refer to Figure 28-1. Suppose that the economy is currently at point A,and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point C in the long run?

A) Buy treasury bills.
B) Sell treasury bills.
C) Lower the discount rate.
D) Increase the money supply.
E) No policy will move the economy to point C in the long run.

Question 10

Figure 28-1

Assume weak growth in aggregate demand keeps the economy below potential GDP,so unemployment rises but inflation falls.This explains the ________ slope of the short-run Phillips curve.

A) positive
B) negative
C) zero
D) infinite

Question 11

Alejandro expects the price level to rise from 105 this year to 108 next year.If the price level rises to 110 next year instead of 108,which of the following will occur?

A) Alejandro's real wage remains unchanged.
B) Alejandro's real wage falls.
C) Alejandro's real wage rises.
D) Alejandro's real wage may rise or fall, depending on the unemployment rate.

Question 12

In a graph of unemployment rates (on the horizontal axis)versus inflation rates (on the vertical axis),the short-run Phillips Curve is

A) downward sloping.
B) horizontal.
C) vertical.
D) upward sloping.

Question 13

If workers and firms expect that inflation will be 5 percent next year,and real wages are not changing over time,by how much will nominal wages increase?

A) 5 percent
B) more than 5 percent
C) less than 5 percent
D) depends on actual inflation for next year

Question 14

If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent.

A) structural
B) frictional
C) cyclical
D) dynamic

Question 15

In the decade of the ________,A.W.Phillips plotted data for Great Britain which revealed a relationship between rates of changes in wages versus unemployment rates. Economists later discovered other "Phillips Curve" relationships between rates of inflation versus unemployment rates.

A) 1930s
B) 1940s
C) 1950s
D) 1960s

Question 16

If actual inflation is greater than expected inflation,

A) real wages rise.
B) real wages fall.
C) the Phillips curve is a vertical line.
D) the unemployment rate rises.

Question 17

According to the ________ Phillips curve,the unemployment rate and the inflation rate are negatively related.

A) long-run
B) short-run
C) long-run and short-run
D) rational expectations

Question 18

CarMax benefitted when the Federal Reserve ________ in 2008.This Fed action would help increase demand for its used cars,which would allowed Carmax to increase employment and increase prices.

A) lowered its target for the federal funds rate
B) increased the discount rate
C) lowered the required reserve rate
D) implemented a series of open market sales of Treasury bonds

Question 19

Evidence shows that for many people,delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills,making it harder for them to find employment.This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment?

A) cyclical
B) frictional
C) seasonal
D) structural

Question 20

Figure 28-1

Refer to Figure 28-1. What should the Federal Reserve do if it wants to move from point A to point C in the short-run Phillips curve depicted in the figure above?

A) buy treasury bills
B) sell treasury bills
C) raise the discount rate
D) decrease the money supply
E) raise taxes

Question 21

In a survey,Robert Shiller found that most workers believe that an increase in inflation will lead quickly to an increase in wages.

Question 22

In an effort to discover whether or not workers understand inflation,economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary,the most popular response coming from workers was:

A) "My wages usually catch up to rising prices within a year."
B) "The price increase will create extra profit for my employer.... There will be no affect on my pay."
C) "My wages have always increased by more than the rate of inflation."
D) None of the above are correct.

Question 23

The natural rate of unemployment equals

A) the rate of structural unemployment.
B) structural plus frictional unemployment.
C) structural plus frictional plus cyclical unemployment.
D) the rate of unemployment we observe in any given period of measurement.

Question 24

Workers at a local construction company are paid $32.50 per hour,and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation.Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers.

Question 25

If the unemployment rate in the economy is steady at 4 percent per year,how does the short-run Phillips curve predict that the inflation rate will be changing,if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations.Provide an appropriate graph to support your discussion.

Question 26

If actual inflation is greater than expected inflation,what is the relationship between the actual real wage and the expected real wage?

A) The actual real wage will be lower than the expected real wage.
B) The actual real wage will be higher than the expected real wage.
C) The actual real wage will be equal to the expected real wage.
D) The relationship between the actual real wage and the expected real wage cannot be predicted.

Question 27

A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods is called a ________ relationship.

A) frictional
B) structural
C) cyclical
D) dynamic

Question 28

When will a decrease in aggregate demand not result in a lower inflation rate in the short run?

Question 29

In the 1960s,many economists and policymakers believed the trade-off between inflation and unemployment was permanent.

Question 30

Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take,in these times,before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored.

A) 25
B) 42
C) 64
D) 81

Question 31

If changes in inflation are higher than expected,

A) the short-run Phillips curve will be positively sloped, but not vertical.
B) the short-run Phillips curve will be negatively sloped.
C) the short-run Phillips curve will be vertical.
D) the long-run Phillips curve will be negative sloped.

Question 32

All other factors held constant,increased growth in aggregate demand will

A) increase inflation.
B) reduce unemployment.
C) move the economy to a higher point on the short-run Phillips curve.
D) All of the above are correct.

Question 33

What can the Federal Reserve do to reduce the natural rate of unemployment?

A) nothing
B) follow expansionary monetary policy that will increase inflation
C) follow expansionary monetary policy that will reduce inflation
D) follow contractionary monetary policy that will increase inflation

Question 34

What is the natural rate of unemployment?

A) the unemployment rate that exists when the economy is at potential GDP
B) the unemployment rate that exists when the economy is at a trough in a business cycle
C) an unemployment rate of 0%
D) any unemployment rate that is above the inflation rate

Question 35

An increase in frictional unemployment will

A) shift the long-run Phillips curve to the right.
B) increase the natural rate of unemployment.
C) shift the short-run Phillips curve to the right.
D) All of the above are correct.
E) None of the above are correct.

Question 36

What action should the Fed take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation?

Question 37

The natural rate of unemployment will not change following an increase in ________ unemployment.

A) cyclical
B) frictional
C) structural
D) all of the above

Question 38

Ceteris paribus,in the short run following an increase in the rate of growth in Aggregate Demand,we would expect to see an increase in the rate of inflation and an increase in the rate of unemployment.

Question 39

If the actual rate of inflation exceeds the expected rate of inflation,the actual real wage is greater than the expected real wage and unemployment falls.

Question 40

The expansionary monetary and fiscal policies of the 1960s resulted in ________ inflation rates and ________ rates of unemployment.

A) high; high
B) low; low
C) low; high
D) high; low

Question 41

An increase in the expected inflation rate will

A) shift the short-run Phillips curve to the right.
B) shift the short-run Phillips curve to the left.
C) reduce the inflation rate.
D) reduce the unemployment rate.

Question 42

Figure 28-2

An increase in expected inflation will

A) increase real wages.
B) decrease the natural rate of unemployment.
C) shift the long-run Phillips curve to the right.
D) None of the above are correct.

Question 43

Figure 28-2

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

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

Question 44

A decrease in cyclical unemployment will

A) shift the long-run Phillips curve to the left.
B) decrease the natural rate of unemployment.
C) shift the short-run Phillips curve to the left.
D) All of the above are correct.
E) None of the above are correct.

Question 45

Figure 28-4

Refer to Figure 28-4.Consider the Phillips curves shown in the above graph. We can conclude from this graph that

A) the natural rate of unemployment in this economy is 5.5 percent.
B) the expected rate of inflation in this economy is 10 percent.
C) ceteris paribus, a fall in the rate of inflation to 5 percent will increase unemployment to 7.5 percent in the short run.
D) All of the above are correct.

Question 46

Ceteris paribus,an increase in the current or actual rate of inflation will cause

A) the short run Phillips curve to shift upward.
B) the unemployment rate to decrease (a movement along the short run Phillips curve).
C) the long run Phillips curve to shift leftward.
D) expectations of future inflation rates to be revised downward.

Question 47

Figure 28-2

Refer to Figure 28-2.The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by

A) an increase in the expected inflation rate from 4.0 to 5.5 percent.
B) an increase in the natural rate of unemployment from 5.5 to 6.8 percent.
C) either an increase in expected inflation from 4.0 to 5.5 percent or an increase in the natural rate of unemployment from 5.5 to 6.8 percent.
D) None of the above are correct.

Question 48

In the 1960s,many economists and policy makers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________,who argued that there is no trade-off between inflation and unemployment and the long run.

A) Robert Lucas and Thomas Sargent
B) Finn Kydland and Edward Prescott
C) Paul Samuelson and James Tobin
D) Milton Friedman and Edmund Phelps

Question 49

If the long-run aggregate supply curve is vertical,

A) the economy stays at the natural rate of inflation in the long run.
B) the short-run Phillips curve must be vertical.
C) unemployment and inflation are positively related in the long run.
D) the trade-off between unemployment and inflation cannot be permanent.

Question 50

Where does the short-run Phillips curve intersect the long-run Phillips curve?

A) at the point where the rate of inflation and the unemployment rate are equal
B) at the natural rate of inflation
C) at the point where actual inflation is equal to expected inflation
D) There is no intersection between the short-run and long-run Phillips curves.

Question 51

Figure 28-4

The ________ curves are both vertical.

A) aggregate demand and short-run Phillips
B) long-run aggregate supply and short-run Phillips
C) long-run aggregate supply and long-run Phillips
D) short-run aggregate supply and short-run Phillips

Question 52

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

A) The Fed could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent.
B) The Fed could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy.
C) The Fed could follow contractionary monetary policy that would reduce the federal funds rate to zero so investment will rise consistently.
D) The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal.

Question 53

If workers and firms raise their inflation expectations,

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 54

Figure 28-4

Monetary policy has ________ impact on the long-run Phillips curve.

A) a positive
B) a negative
C) an unpredictable
D) no

Question 55

Figure 28-3

Refer to Figure 28-3.Consider the shift in the short-run Phillips curves shown in the above graph. This shift may be explained by

A) an increase in the natural rate of unemployment from 5.0 to 6.2 percent.
B) an increase in the expected rate of inflation from 4.0 to 5.5 percent.
C) either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an increase in the expected rate of inflation from 4.0 to 5.5 percent.
D) None of the above are correct.

Question 56

In the long run,the Phillips curve is a ________ at ________.

A) horizontal line; 0% inflation
B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply
C) vertical line; the natural rate of unemployment
D) None of the above are correct.

Question 57

Which of the following would decrease the natural rate of unemployment?

A) a decrease in the number of younger, less skilled workers in the economy
B) an increase in the generosity of unemployment insurance programs
C) fewer restrictions on unions to negotiate wage changes with companies
D) a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly

Question 58

Figure 28-4

A decrease in aggregate demand will

A) cause inflation.
B) decrease unemployment.
C) move the economy to a lower point on the short-run Phillips curve.
D) cause the short-run Phillips curve to shift to the right.

Question 59

Figure 28-4

In the short run,the Federal Reserve can affect which of the following?

A) the inflation rate
B) the unemployment rate
C) the growth rate of real GDP in the economy
D) all of the above

Question 60

Figure 28-4

If the economy is producing ________,unemployment is at its natural rate.

A) at potential GDP
B) above potential GDP
C) at an inflation rate of zero
D) at an unemployment rate of zero

Question 61

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy,which of the following would you expect to see?

A) The Fed's policies will be deflationary.
B) The Fed's policies will be inflationary.
C) The rate of inflation will fall as the Fed tries to reduce the unemployment rate.
D) The Fed will reduce the natural rate of unemployment.

Question 62

Monetary policy can

A) shift the short-run trade-off between inflation and unemployment if it affects expected inflation.
B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment.
C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment.
D) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible.

Question 63

Figure 28-5

Refer to Figure 28-5.Consider the Phillips curves depicted in the graph above.The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year,and it succeeds. If expectations of inflation are not altered by the Fed's announcement,the rate of unemployment will be ________ in the short run.

A) less than 5.5 percent
B) 5.5 percent
C) between 5.5 and 7.5 percent
D) 7.5 percent

Question 64

According to the "rational expectations" school of thought in macroeconomics,the short-run Phillips curve is ________ in face of anticipated changes in monetary policy.

A) negatively sloped
B) positively sloped
C) vertical
D) horizontal

Question 65

Figure 28-4

If strong aggregate demand is pushing the economy beyond potential real GDP,which of the following must be true?

A) The economy is at an equilibrium that is on the long-run aggregate supply curve.
B) The economy is at an equilibrium that is on the long-run Phillips curve.
C) The economy is at an equilibrium that is not on the long-run Phillips curve.
D) Expansionary monetary policies will push the economy back to the long-run Phillips curve.

Question 66

In the long run,the Fed may decrease the unemployment rate only if it is willing to increase the rate of inflation.

Question 67

If actual inflation is less than expected inflation,what is the relationship between the actual real wage and the expected real wage?

A) The actual real wage is lower than the expected real wage.
B) The actual real wage is higher than the expected real wage.
C) The actual real wage is equal to the expected real wage.
D) The relationship between the actual real wage and the expected real wage cannot be predicted.

Question 68

An increase in the level of structural unemployment will shift the long-run Phillips curve.

Question 69

Use the following information to draw a graph showing the short-run and long-run Phillips curves,and be sure your graph shows the point where the short-run and long-run Phillips curves intersect.
Natural rate of unemployment = 4 percent
Current rate of unemployment = 5 percent
Expected inflation rate = 3 percent
Current inflation rate = 2 percent

Question 70

Figure 28-4

The short-run Phillips curve is ________ than the long-run Phillips curve.

A) flatter
B) steeper
C) less stable
D) Both B and C are correct.

Question 71

According to the "rational expectations" school of thought in macroeconomics,the short-run Phillips curve is ________ in face of unanticipated changes in monetary policy.

A) negatively sloped
B) positively sloped
C) vertical
D) horizontal

Question 72

If rational workers and firms know that the Federal Reserve is following a contractionary monetary policy,they will expect inflation to ________ and will adjust wages so that the real wage ________.

A) increase; remains unchanged
B) decrease; remains unchanged
C) decrease; increases
D) increase; decreases

Question 73

If workers accurately predict the rate of inflation,is there a short-run trade-off between inflation and unemployment,as predicted by the Phillips curve? Why or why not?

Question 74

According to economists Robert Lucas and Thomas Sargent,the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of

A) unexpected changes in monetary policy.
B) expected changes in monetary policy.
C) unexpected changes in fiscal policy.
D) expected changes in fiscal policy.

Question 75

The actual real wage is lower than the expected real wage if

A) actual inflation is less than expected inflation.
B) expected inflation is less than actual inflation.
C) actual unemployment is less than expected unemployment.
D) actual unemployment is less than actual inflation.

Question 76

During which of the following time periods did inflation remain above 5 percent every year?

A) 1990 through 1999
B) 1973 through 1982
C) 1968 through 1971
D) 1958 through 1962

Question 77

An increase in expected inflation will shift the short-run Phillips Curve.

Question 78

If the Fed attempts to reach and maintain very low rates of unemployment,we would expect the rate of inflation to rise.

Question 79

Figure 28-4

When unemployment is above its natural rate,the inflation rate will eventually

A) increase.
B) decrease.
C) move to its natural rate.
D) become equal to the natural rate of unemployment.

Question 80

Figure 28-4

The short-run Phillips curve will not shift unless there is

A) an increase in the unemployment rate.
B) an increase in inflation that is unanticipated.
C) a decrease in inflation that is unanticipated.
D) a change in inflation expectations.