Chapter 17- Inflation, Unemployment & Federal Reserve Policy

discretion strategy

Allows the Fed to adjust its policies based on changes in the economy.

Paul Volcker is credited largely with which of the​ following? A. The​ "Volcker disinflation." B. Fighting inflation by reducing the growth of the money supply. C. Driving up the unemployment rate. D. A and B only.

D. A and B only

What is the Fed doing to increase the credibility of its​ policies? A. Whenever a change in policy is​ announced, the change actually takes place. B. Announcing the federal funds target rate. C. Conducting more open market purchases of government securities. D. A and B only.

D. A and B only

In the​ figure, expected inflation is initially at​ 1.5%. When expected inflation increases to​ 4.5%, which of the following will​ occur? A. To have​ 3.5% unemployment​ rate, inflation would be​ 7.5%. B. At the natural rate of​ unemployment, inflation is​ 4.5%. C. Unemployment reaches the natural rate of​ 5%. D. All of the above.

D. All of the above

Which of the following statements is ​correct? A. In the long​ run, the Phillips curve is a vertical line at the natural rate of unemployment. B. In the long​ run, a higher or lower price level has no effect on real GDP. C. In the long​ run, a higher or lower inflation rate has no effect on the unemployment rate. D. All of the above.

D. All of the above

According to many economists and​ policymakers, what other options does the Fed have to improve its credibility with​ workers, firms, and​ investors? Part 2 A. Following the Taylor rule. B. Following a discretion strategy. C. Following a rules strategy. D. All of the above.

D. all of the above

As of​ 1993, the Fed sets targets for which of the following in order to achieve price stability and high​ employment?

Federal funds rate

rules strategy

Following specific and publicly announced guidelines for​ policy, regardless of the state of the economy.

Why​ doesn't the Phillips curve represent a permanent​ trade-off between unemployment and inflation in the long​ run?

In the long​ run, aggregate supply is vertical.

When SRAS 1 shifts to SRAS 2, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

The unemployment rate in the United States is usually __________ than the unemployment rates in most other high-income countries, partly because the United States has __________ requirements for the unemployed to receive government payments.

Lower, More stringent

Which of the following statements concerning the Phillips curve is​ correct?

Many economists and policymakers in the 1960s viewed the Phillips curve as a structural relationship.

How can the Fed fight a combination of rising unemployment and rising​ inflation?

Not​ easily; neither expansionary nor contractionary monetary policy can solve both problems simultaneously

Which of the following statements is true about the Fed under the leadership of Chairman Alan Greenspan between 1987 and​ 2006?

The Fed attempted to enhance its credibility by announcing its monetary policy action at the conclusion of each FOMC meeting.

Taylor Rule

The Fed sets a target federal funds rate following an equation that includes the inflation​ rate, the real equilibrium federal funds​ rate, the​ "inflation gap," and the​ "output gap."

Natural Rate of Unemployment (NRU)

The unemployment rate that exists when the economy is at potential GDP.

How can the Fed fight a combination of rising unemployment and rising inflation?

These goals are conflicting and cannot be addressed simultaneously.

Which of the following decisions does the textbook discuss as an action by the Fed during Chairman Alan​ Greenspan's term that possibly contributed to the financial crisis of​ 2007-2009?

The​ Fed's decision to keep the target for the federal funds rate at 1 percent for more than 18 months after the end of the 2001 recession.

Which of these is the prevailing view of economists about the unemployment insurance program in the United States?

Unemployment insurance is a good idea because it helps the unemployed maintain their income and spending, which helps reduce the severity of recessions.

What effect does expansionary monetary policy have on equilibrium if consumers have rational​ expectations?

a movement from point A to point C

Economists who believed that the Phillips curve represented a structural relationshipLOADING... believed that the curve represented...

a permanent​ trade-off between unemployment and inflation.

In a real business cycle​ model, which of the following best explains an increase in real GDP above the​ full-employment level?

a positive technology shock

In the real business cycle model, which of these best explains an increase in real GDP above the full-employment level?

a positive technology shock

structural relationship

a relationship that depends on the basic behavior of consumers and firms and that remains unchanged over long periods

If actual inflation is higher than expected​ inflation, the

actual real wage is less than the expected real​ wage: unemployment falls.

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low. In​ 1987, President Ronald Reagan appointed Alan Greenspan as the chairman of the Board of Governors of the Federal Reserve. Greenspan was also determined to keep inflation low. The greater capacity of the economy to produce goods and services at every price level contributed to the very low rates of inflation in the U.S. during the late 1990s and the early 2000s.

During the 1980s and​ 1990s, the relationship between growth in M2 and inflation

broke​ down, and the Fed announced that it would no longer set targets for M2.

If workers and firms have rational expectations and wages and prices adjust quickly, an expansionary monetary policy will result in higher inflation;

but no change in the unemployment rate

The concept of a nonaccelerating inflation rate of unemployment​ (NAIRU) helps us to understand why in the long​ run, the Federal Reserve

can affect the inflation rate but not the unemployment rate

If the​ long-run aggregate supply curve is​ vertical, then the Phillips curve

cannot be downward sloping in the long run.

Which of these factors can cause the natural rate of unemployment to change?

demographic changes

A significant reduction in the inflation rate is called

disinflation

The labor market may take a long time to adjust to economic growth due to __________.

excess capacity in production

rational expectations

expectations formed by using all available information about an economic variable

There is a different​ short-run Phillips curve for every level of the​ ___________ inflation rate. The inflation rate at which the​ short-run Phillips curve intersects the​ long-run Phillips curve equals the​ ___________ inflation rate.

expected; expected

When aggregate demand increases, unemployment will usually __________ and inflation will __________.

fall; rise

Under Fed Chairman Alan Greenspan's leadership the Federal Reserve shifted its policy and began targeting the __________ to accomplish policy goals.

fed funds rate

According to rational expectations theory, any announced policy change will:

have no impact on output

According to real business cycle theory, shifts in aggregate demand:

have no impact on real GDP

Slow growth in aggregate demand leads to...

higher unemployment and lower inflation.

If expected inflation is higher than actual​ inflation, actual real wages in the economy will turn out to be​ _________ than expected real​ wages; consequently, firms will hire​ _________ workers than they had planned

higher; fewer

If the unemployment rate is below the natural​ rate, the inflation rate tends to​ ___________, and​ eventually, the​ short-run Phillips curve will shift​ _______.

increase; up

During the mid-to-late 1970s the economy was experiencing both high inflation and high unemployment. The Fed adopted a policy of:

increasing interest rates to combat the inflation.

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The​ curve, shown at the​ right, indicates what type of relationship between the two​ variables?

inverse relationship

The long-run Phillips curve __________.

is vertical at the natural rate of unemployment

A negative supply​ shock, such as the OPEC oil price increases of the early​ 1970s, can be illustrated by a shift to the​ ______________ of the​ short-run aggregate supply curve and a shift​ _________________ of the​ short-run Phillips curve.

left; up

Countries that grant their central banks higher degrees of independence from the political process are more likely to have:

lower inflation

After Fed Chairman Paul Volcker began fighting inflation in​ 1979, workers and firms eventually​ ____________ their expectations of future​ inflation, and the​ short-run Phillips curve shifted​ ___________.

lowered; down

real business cycle model

models that focus on real rather than monetary explanations of fluctuations in real GDP

If high unemployment continues to be a problem for several years it is possible that the:

natural rate of unemployment may increase

Monetary stimulus designed to increase aggregate demand would have __________ on real output according to real business cycle theory.

no impact

In the​ figure, at what point is the inflation rate​ stable? That​ is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of​ unemployment?

point C

The output gap is the difference between __________.

potential GDP & actual GDP

The theory that workers will use all available information to form forecasts of the future expected inflation is known as:

rational expectations

Models that use​ factors, such as technology​ shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models

According to Milton Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to __________.

rise above or fall below the natural rate

According to Milton​ Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to

rise above or fall below the natural rate

According to real business cycle theory, a major source of fluctuations in economic activity is __________.

shocks to technology

A Phillips curve is a curve showing the __________.

short-run relationship between the unemployment rate and the inflation rate

A relationship based on consumer and firm behavior that remains consistent for long periods of time is known as a:

structural relationship

​If, in the long​ run, real GDP returns to its potential​ level, then in the long​ run,

the Phillips curve is vertical

If workers and firms have rational expectations and wages and prices adjust​ quickly, then if the Fed announces a credible expansionary monetary​ policy,

the inflation rate will​ increase, but the unemployment rate will be unchanged.

Cross-country evidence supports that the more independent a​ country's central​ bank,

the lower its inflation rate

nonaccelerating inflation rate of unemployment​

the unemployment rate at which the inflation rate has no tendency to increase or decrease.

In the late 1970s Federal Reserve Chairman Paul Volcker contracted the money supply to reduce the rate of inflation. One result of this monetary policy was

to increase interest rates which reduced aggregate demand.

The natural rate of unemployment is the __________.

unemployment rate that results when the economy produces the potential level of real GDP

Most economists agree that in the long run there is no tradeoff between inflation and unemployment which means the long-run Phillips curve is:

vertical

Phillips Curve

A curve showing the​ short-run relationship between the unemployment rate and the inflation rate.

If workers ignore inflation in forming their expectations of the real wage​ rate, what is the effect of an expansionary monetary​ policy?

A move up along the​ short-run Phillips curve.

Indicate the two main objections to the idea that the​ short-run Phillips curve is vertical.

-Contracts with workers keep wages sticky. Your answer is correct. -Workers and firms might not have rational expectations.