Deck 9: The Goals of Stabilization Policy: Low Inflation and Low Unemployment

Question 1

If the market rate of interest is 13%, the growth of nominal GDP 9%, and the growth of real GDP 2%, then

A) the rate of inflation is 11%.
B) the rate of inflation is 4%.
C) the rate of inflation cannot be determined.
D) none of the above

Answer 1

none of the above

Question 2

The costs imposed by inflation should be lessened in the future because of the following reform that took place during the early 1980s

A) airline deregulation.
B) issuance of indexed government bonds.
C) changing tax laws to ensure that savers are taxed only on real, rather than nominal capital gains.
D) lifting of limits on interest paid on checking and savings accounts.

Answer 2

lifting of limits on interest paid on checking and savings accounts.

Question 3

"Shoe-leather costs" refer to

A) a cobbler's payment for leather.
B) "rubber costs: on today's shoes.
C) the inconvenience imposed by higher interest rates.
D) financial deregulation of retail business firms.

Answer 3

the inconvenience imposed by higher interest rates.

Question 4

If the nominal interest rate is 10% and expected inflation is 5%, the real expected interest rate is

A) 15%.
B) -5%.
C) 5%.
D) 10%.

Question 5

In the early 1980s the government's primary method of combating inflation was

A) price and wage controls.
B) undoing the "self-inflicted" wounds.
C) restrictive monetary policy.
D) indexing bonds to protect savers.

Question 6

If short-term government bond rates were indexed

A) such bonds would be a poor hedge against inflation.
B) banks and saving and loan institutions would likely lose deposits.
C) the government would gain from the implied inflation tax.
D) the government would gain from the implied inflation subsidy.

Question 7

Inflation has no effect on an economy's well-being if

A) it is universally and accurately anticipated.
B) relative prices are unaffected.
C) the nominal rate of interest for both savers and borrowers rises by an amount just equal to the rate of inflation.
D) all of these

Question 8

Unanticipated inflation will hurt ________ and help ________.

A) pensioners; borrowers
B) borrowers; pensioners
C) the government; tax payers
D) homeowners; banks

Question 9

Which of the following anti-inflation policies imposes costs on society?

A) price controls.
B) indexation.
C) reduced growth in nominal demand.
D) all of these

Question 10

The real rate of interest

A) is equal to the nominal rate when Y equals YN.
B) is equal to the nominal rate minus the rate of inflation.
C) is equal to the nominal rate plus the rate of inflation.
D) is never negative.

Question 11

According to Gordon, the main losers due to the redistributive effect of the postwar inflation in the United States were

A) households.
B) corporations.
C) government.
D) foreigners.

Question 12

The costs of inflation depend upon

A) whether it is anticipated or unanticipated.
B) who pays it and who receives it.
C) the future savings rate.
D) none of the above.

Question 13

"Disgruntled" workers who quit their jobs to find "a more reasonable boss" are experiencing

A) involuntarily unemployment.
B) mismatch unemployment.
C) cyclically unemployment.
D) turnover unemployment.

Question 14

The elimination of hourly rate assembly line jobs for unskilled workers by robots is an example of

A) involuntary unemployment.
B) mismatch unemployment.
C) cyclical unemployment.
D) turnover unemployment.

Question 15

A program of complete indexation would

A) eliminate most of the costs of inflation.
B) increase the sensitivity of the economy to supply shocks.
C) make the role of expectations negligible.
D) all of these

Question 16

Unanticipated inflation will insure that

A) homeowners with outstanding mortgage balances are hurt.
B) homeowners with outstanding mortgage balances are benefited.
C) creditors gain, debtors lose.
D) none of the above

Question 17

The natural rate of unemployment is that rate

A) below which the economy can never be.
B) corresponding to full-employment.
C) corresponding to a constant rate of inflation.
D) which is zero.

Question 18

The actual real interest rate and the expected real interest rate will be identical if

A) pe = p.
B) pe > p.
C) pe < p.
D) none of the above

Question 19

Indexation is designed to

A) moderate the costs of inflation, not inflation itself.
B) rapidly reduce inflation.
C) reduce the natural rate of unemployment.
D) rapidly reduce inflationary expectations.

Question 20

Unemployment that results when individuals who have voluntarily quite their jobs are seeking jobs is called

A) cyclical unemployment.
B) turnover unemployment.
C) mismatch unemployment.
D) natural unemployment.

Question 21

Which of the following will not affect the natural rate of unemployment?

A) minimum wage legislation
B) restrictive monetary policy
C) employer discrimination
D) geographic immobility

Question 22

An increase in the amount and time period for which unemployment compensation is paid will most likely

A) increase the structural rate of unemployment.
B) leave the natural rate of unemployment unchanged.
C) decrease the natural rate of unemployment.
D) increase turnover unemployment.

Question 23

If other things are constant, the longer the average unemployed worker searches before accepting a job

A) the lower will be the measured unemployment rate.
B) the higher will be the measured unemployment rate.
C) the lower will be the natural unemployment rate.
D) none of the above.

Question 24

Which of the following statements is true?

A) Adult males, adult females, and teenagers all have similar rates of unemployment due to job losses.
B) Almost half of the total teenage unemployment rate appears to be due to the search for the first job.
C) Relative to adult males, adult females and teenagers have more frequent unemployment due to reentry and higher quit rates.
D) All of the above.

Question 25

A worker that quits her job

A) is always counted among the unemployed.
B) is never counted among the unemployed.
C) will be counted among the structurally unemployed.
D) may or may not be counted among the unemployed.

Question 26

Which of the following would not reduce the natural rate of unemployment?

A) a tax cut
B) an increase in government expenditures
C) wage or price controls
D) all of the above

Question 27

When mismatch unemployment characterizes an economy

A) monetary and fiscal policies to raise AD are the appropriate government action.
B) only monetary policy will be effective.
C) monetary and fiscal policies to raise AD are not the appropriate government action.
D) only general (not specific) fiscal policy will be effective.

Question 28

The payment of subsidies to firms who locate in high unemployment, depressed regions

A) is an example of a program to cure job discrimination.
B) is an example of a program to cure "mismatch unemployment."
C) has been universally successful in curing unemployment.
D) is "bribery" and against the law.

Question 29

The turnover view of unemployment stresses that

A) most job vacancies have skill requirements not possessed by the unemployed.
B) many job vacancies are located in different areas of the country than are the unemployed.
C) there exist incentives for workers to refuse to accept jobs.
D) there exists racial/and or sex discrimination against some workers.

Question 30

Mismatch and turnover unemployment, while conceptually easy to distinguish, are often difficult to identify. Ceteris paribus, a person out of work for two months would be classified by Gordon as

A) experiencing turnover unemployment.
B) experiencing mismatch unemployment.
C) impossible to distinguish the type.
D) first frictionally unemployed (the first month) and then structurally unemployed.

Question 31

It appears that many business firms discriminate against hiring young women of child bearing age in the United States and that this type of discrimination has been reduced in Europe. This may be an example of successful government intervention because

A) many European governments have laws against this type of discrimination.
B) many European governments subsidize maternity leave and child care, lowering the cost of hiring these women.
C) Europeans are less likely to discriminate on the basis of gender.
D) Europeans are more likely to discriminate on the basis of gender.

Question 32

In recent years new automobile factories have opened in California and Ohio and closed in Detroit where the unemployment of automobile workers has increased. This unemployment could be decreased if

A) "moving costs" from Detroit to California and Ohio were reduced.
B) information about the new jobs was made available to the unemployed workers at reduced cost.
C) workers with the appropriate skills were relatively scarce in Ohio and California.
D) all of the above.

Question 33

The layoff of workers in virtually all industries during the 1982 recession is an example of the classification of workers as

A) voluntarily unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) frictionally unemployed.

Question 34

"Natural unemployment" includes those out of work because of

A) expected or normal turnover which will always characterize a part of the labor force.
B) structural unemployment caused by normal technological change in production.
C) a recession.
D) A and B.

Question 35

The payment of unemployment compensation tends to induce business firms to

A) layoff workers as opposed to lowering sales.
B) search for new workers for shorter periods of time.
C) layoff workers as opposed to increasing inventories and/or reducing hours worked for all employees.
D) recall previously laid off workers more rapidly.

Question 36

A major difference between the costs of unemployment and the costs of inflation is that

A) the former is structural the latter frictional.
B) the government pays the latter, the population pays the former.
C) unemployment costs are concentrated among a few people, while inflation costs are distributed more broadly across the entire population.
D) unemployment costs are distributed among people, while inflation costs are distributed more narrowly across the entire population.

Question 37

Many extended periods of high actual unemployment above the natural rate have been the result of

A) deliberate government anti-inflationary policy.
B) high job turnover.
C) mismatches in the labor market.
D) unemployment compensation.

Question 38

Mismatch and turnover unemployment, while conceptually easy to distinguish, are often difficult to identify. Ceteris paribus, a person out of work for six months or an extended period would be classified by Gordon as

A) experiencing turnover unemployment.
B) experiencing mismatch unemployment.
C) impossible to distinguish the type.
D) first frictionally unemployed (the first month) and then structurally unemployed.

Question 39

Suppose that the number of jobs for engineers expands by 10 percent per year, the number of new engineers by 5 percent per year while the number of automobile mechanics grows by 8 percent and the number of new automobile mechanics jobs grows by 3 percent. We conclude that

A) frictional unemployment will increase.
B) frictional unemployment will decrease.
C) structural unemployment will increase.
D) structural unemployment will increase 4 times.

Question 40

The "benefits" from government programs to reduce mismatch unemployment include reduction in

A) private costs such as lost income and erosion of job skills.
B) private costs such as lost leisure and lower alcohol consumption.
C) social costs such as lower unemployment compensation and welfare payments.
D) A and C.

Question 41

In the United States, the long-run inflation rate can be expressed simply as the growth rate of money

A) plus the long-run growth rate of velocity.
B) minus the long-run growth rate of velocity.
C) plus the long-run growth rate of real GDP.
D) minus the long-run growth rate of real GDP.

Question 42

When the Federal Reserve raises the growth rate of the money supply to a permanently higher level, this produces ________ in real GDP and ________ in the inflation rate.

A) a permanent increase, a permanent increase
B) a permanent increase, a temporary increase
C) no change, a temporary increase
D) a temporary increase, a temporary increase
E) a temporary increase, a permanent increase

Question 43

The "quantity equation" states that nominal GDP is equal by the definition of velocity to the money supply ________ velocity.

A) plus
B) minus
C) multiplied by
D) divided by

Question 44

In the quantity equation framework for understanding the determinants of long-run inflation, a rise in government spending ________ velocity, putting ________ pressure on inflation.

A) raises, upward
B) raises, downward
C) lowers, upward
D) lowers, downward

Question 45

Over a year, the money supply in a nation grew by 8 percent, while velocity rose by 2 percent and real GDP rose by 3 percent. This results in an inflation over the year of ________ percent.

A) 7
B) 9
C) 13
D) 3

Question 46

In the late 1980s, Canada embarked on an ambitious policy of reducing inflation to zero. Inflation did come down, while the unemployment rate ________, which ________ the U.S. disinflation experience of the 1980s.

A) rose, runs counter to
B) rose, duplicates
C) remained nearly constant, runs counter to
D) remained nearly constant, duplicates

Question 47

Presidents running for re-election are tempted to urge the Federal Reserve to ________ the rate of money growth in order to reap the political benefits of ________.

A) reduce, permanently lower inflation
B) reduce, temporarily lower inflation
C) increase, temporarily lower inflation
D) increase, temporarily higher real GDP
E) increase, permanently higher real GDP

Question 48

Rising velocity means that people want to hold ________ nominal money per dollar of nominal GDP, which ________ the inflationary tendency of an increase in the money supply as one way of re-equating the demand and supply of money.

A) more, strengthens
B) more, weakens
C) less, strengthens
D) less, weakens

Question 49

The U.S. macroeconomic experience of the early to mid-1980s is an example of how

A) reducing inflation comes at the cost of a permanent reduction in real GDP.
B) reducing inflation comes at the cost of a temporary reduction in real GDP.
C) reducing inflation can be done costless by simply increasing the money growth rate.
D) increasing the money growth rate affects inflation alone, and not real GDP.

Question 50

In the United States, the long-run average growth rate of velocity in recent decades has been

A) about 2 percent per year.
B) about 1 percent per year.
C) virtually zero.
D) about -1 percent per year.
E) about -2 percent per year.

Question 51

When the misery index is used to judge macroeconomic conditions, reducing inflation by one percentage point

A) has no effect at all on how we judge the economy's performance.
B) is of less benefit to the economy than reducing the unemployment rate by one percentage point.
C) gives the same benefit to the economy as reducing the unemployment rate by one percentage point.
D) is of greater benefit to the economy than reducing the unemployment rate by one percentage point.

Question 52

In the quantity equation framework for understanding the determinants of long-run inflation, a depreciation of the exchange rate ________ velocity, putting ________ pressure on inflation.

A) raises, upward
B) raises, downward
C) lowers, upward
D) lowers, downward

Question 53

When Okun's "misery index" is used to judge macroeconomic conditions, inflation is being considered

A) not to be a macroeconomic problem at all.
B) a less serious macroeconomic problem than unemployment.
C) just as serious a macroeconomic problem as unemployment.
D) a more serious macroeconomic problem than unemployment.

Question 54

The textbook uses as its precise definition of hyperinflation an inflation rate

A) below zero.
B) of less than one percent per year.
C) of more than one hundred percent per year.
D) of more than one thousand percent per year.
E) of more than fifty percent per month.

Question 55

In the quantity equation framework for understanding the determinants of long-run inflation, a drop in consumer confidence ________ velocity, putting ________ pressure on inflation.

A) raises, upward
B) raises, downward
C) lowers, upward
D) lowers, downward

Question 56

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of the money supply ________ the growth rate of velocity ________ the growth rate of real GDP.

A) plus, plus
B) plus, minus
C) minus, plus
D) minus, minus

Question 57

The textbook cites an estimate of the "sacrifice ratio" in the United States of approximately

A) one-third.
B) one-half.
C) one.
D) three.
E) six.

Question 58

Over a year, the money supply in a nation grew by 6 percent, while velocity fell by 1 percent and real GDP rose by 2 percent. This results in an inflation over the year of ________ percent.

A) 9
B) 7
C) 5
D) 3

Question 59

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of nominal GDP ________ the growth rate of real GDP.

A) minus
B) plus
C) multiplied by
D) divided by

Question 60

The "excess" growth rate of the money supply is the growth rate of money

A) plus the long-run growth rate of velocity.
B) minus the long-run growth rate of velocity.
C) plus the long-run growth rate of real GDP.
D) minus the long-run growth rate of real GDP.

Question 61

The "nominal" interest rate is the

A) rate actually quoted in financial markets.
B) rate actually quoted in financial markets minus the expected inflation rate.
C) rate actually quoted in financial markets plus the expected inflation rate.
D) rate actually quoted in financial markets divided by the expected inflation rate.

Question 62

When the Fisher Effect holds, a one-percentage-point increase in the long-run money growth rate, because it ________ expected inflation, causes ________ in the nominal interest rate in the long run.

A) equally lowers, a one-percentage-point decrease
B) does not change, a one-percentage point decrease
C) does not change, no change
D) equally raises, no change
E) equally raises, a one-percentage-point increase

Question 63

For inflation to have no real effect on the economy, leaving all decisions and their real outcomes unchanged, five conditions must be met. Which of the following incorrectly states one of those conditions?

A) Inflation is universally and accurately anticipated.
B) All savings and money earn the nominal interest rate.
C) Inflation of p0 percent lowers the nominal interest rate by p0 below the no-inflation nominal rate.
D) Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
E) Inflation raises the prices of all goods by the same percentage.

Question 64

A person who purchased a house with a small down payment just before an unanticipated inflation hits has ________ from the decision to be in debt, and has ________ by having an asset in the form of a house.

A) benefited, benefited again
B) benefited, been hurt
C) been hurt, benefited
D) been hurt, been hurt again

Question 65

The classic loser from an unanticipated inflation is

A) the borrower who pays less nominal interest than expected.
B) the borrower who pays more nominal interest than expected.
C) the saver who earns less real interest than expected.
D) the saver who earns more real interest than expected, and so should have saved more.

Question 66

The "Fisher Effect" occurs when a one-percentage-point rise in expected inflation ________ interest rate by one percentage point

A) raises the expected real
B) lowers the expected real
C) raises the nominal
D) lowers the nominal

Question 67

For inflation to have no real effect on the economy, leaving all decisions and their real outcomes unchanged, five conditions must be met. Which of the following incorrectly states one of those conditions?

A) Inflation is universally and accurately anticipated.
B) All savings earn the nominal interest rate, while money earns zero interest.
C) Inflation of p0 percent raises the nominal interest rate by p0 above the no-inflation nominal rate.
D) Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
E) Inflation raises the prices of all goods by the same percentage.

Question 68

Periods of low or negative inflation are generally ________ to farmers, who are ________ as a group.

A) advantageous, creditors
B) advantageous, debtors
C) harmful, creditors
D) harmful, debtors

Question 69

Higher inflation is particularly damaging to the real value of

A) wages.
B) financial assets.
C) physical assets.
D) government tax revenues.

Question 70

The "expected real" interest rate is the

A) rate actually quoted in financial markets.
B) rate actually quoted in financial markets minus the expected inflation rate.
C) rate actually quoted in financial markets plus the expected inflation rate.
D) rate actually quoted in financial markets divided by the expected inflation rate.

Question 71

Supply shocks are a potential source of higher inflation, unless the government counters with ________ policy that ________ the money growth rate.

A) extinguishing, reduces
B) extinguishing, increases
C) neutral, leaves unchanged
D) accommodative, reduces
E) accommodative, increases

Question 72

Real income is redistributed from ________ in the case of ________ inflation.

A) creditors to debtors, anticipated
B) creditors to debtors, unanticipated
C) debtors to creditors, anticipated
D) debtors to creditors, unanticipated

Question 73

Real income is redistributed from ________ in the case of ________ deflation.

A) creditors to debtors, anticipated
B) creditors to debtors, unanticipated
C) debtors to creditors, anticipated
D) debtors to creditors, unanticipated

Question 74

The government budget constraint tells us that to the extent that government expenditures are not financed by tax collection, the public ends up holding ________ government bonds and ________ money.

A) more, more
B) more, less
C) fewer, more
D) fewer, less

Question 75

For inflation to have no real effect on the economy, leaving all decisions and their real outcomes unchanged, five conditions must be met. Which of the following incorrectly states one of those conditions?

A) Inflation is universally and accurately anticipated.
B) All savings and money earn the nominal interest rate.
C) Inflation of p0 percent raises the nominal interest rate by p0 above the no-inflation nominal rate.
D) Only nominal interest income is taxable and only the nominal cost of borrowing is tax-deductible.
E) Inflation raises the prices of all goods by the same percentage.

Question 76

Investment and saving decisions are assumed by economists to depend on the ________ interest rate.

A) expected nominal
B) nominal
C) expected real
D) real

Question 77

The three sources of government revenue are taxes, the ________ of government bonds, and the ________ of high-powered money.

A) issuance, collection
B) issuance, issuance
C) buying back, collection
D) buying back, issuance

Question 78

Governments promote long-run inflation when they depend on ________ to finance their expenditures.

A) issuing bonds
B) taxation
C) raising the national debt
D) money creation
E) selling off assets

Question 79

If a worker receives 6 percent higher nominal wages over a year in which inflation is 2 percent, the worker's real wages have

A) risen by 8 percent.
B) risen by 4 percent.
C) risen by 3 percent.
D) fallen by 3 percent.
E) fallen by 4 percent.

Question 80

If an increase in expected inflation equally raises the nominal interest rate, the expected real interest rate ________ and thus investment demand ________.

A) rises, increases
B) rises, decreases
C) is unchanged, is unchanged
D) falls, increases
E) falls, decreases