ECON CH. 16

If potential output is higher than actual output, then the unemployment rate is:

above the natural rate.

Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?

an increase in the number of discouraged workers

The problem of debt deflation deepens during an economic slump because:

borrowers have to reduce spending to pay off debts.

During periods of deflation _____ will be hurt and _____ will be helped.

borrowers; lenders

The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _____ of the price level.

classical model

(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

fall to zero.

In the long run, any given percentage increase in the money supply:

leads to an equal percentage increase in the overall price level.

During a liquidity trap:

monetary policy is ineffective, since nominal interest rates cannot fall below zero.

Suppose an economy's aggregate price level increases and its aggregate level of real GDP decreases. This could arise from a _____ shock.

negative supply

(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. SRAS1 will shift to SRAS2 because:

nominal wages rise in the long run.

When inflation is high:

people will decrease their level of real-money holdings.

The Fed monetizes the debt when it:

prints money and buys government debt from the public.

If a high inflation rate leads people to _____ their money holdings, this may lead to a further increase in the money supply and _____ inflation.

reduce; higher

A supply shock:

shifts the short-run Phillips curve.

The long-run Phillips curve shows the relationship between:

unemployment and inflation after expectations of inflation have had time to adjust to experience.

(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at AD-AS Model and the Short-Run Phillips Curve. If the central bank increases the money supply so that aggregate demand shifts from AD1 to AD2, then the inflation rate will be:

2%

(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC2 is based on an expected inflation rate of:

2%

(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014 the output gap was:

NEGATIVE