Ch 19 Macro Practice Questions

In the long run, when the actual inflation rate becomes embedded in people's expectations:

inflation expectations determine inflation

Each point on the labor market Phillips curve is a different combination of:

unexpected inflation and unemployment

upwards shift of SRPC curve; it will have increased

- Please move the SRPC line to reflect what would happen if the public expected more inflation than they previously thought. - If the unemployment rate is still 3%,3%, how does the new inflation rate compare to the original inflation rate?

movement to (5,1)

- The economy is currently producing 5% less output than its potential. In an attempt to boost output, the federal government announces an unexpected stimulus package that you believe will increase output to 5% above potential. a. Move the point on the Phillips curve to illustrate the relationship between unexpected inflation and the output gap after the stimulus.

You are planning next year's pricing strategy for your music store in a very competitive market. The economy has been doing well, operating at full employment for several years, along with an average annual inflation rate of 2%. There are no economic black clouds on the horizon, so you decide to raise prices by:

2%, since that is probaly the expected inflation rate

At the Philadelphia Federal Reserve Bank's website you read that the predicted unemployment rate for 2022 is 3.7%, whereas the estimated equilibrium unemployment rate is 4.1%. The inflation rate for 2022 is predicted to be 5.9%, well above the 2% average for the past decade. In the long run, the MOST likely unemployment rate is _____% and the MOST likely inflation rate is _____%.

4.1; 2

If managers expect the recent inflation rate to continue over time, they have _____ expectations.

adaptive

What could lead to moderate inflation?

a negative supply shock

upwards shift of SRPC curve; 3%

b. Please move the SRPC line to reflect what would happen if the public's inflation expectations increased so that they now expect the inflation rate to increase by 2%. c. If the unemployment rate is still 5%, what is the new inflation rate after this change in expectations?

Demand-pull inflation is inflation resulting from:

excess demand

If there has been a leftward movement along the Phillips curve, the _____ curve has shifted to the _____.

AD; left

When a competitive business sets prices, it takes into account: (i) marginal costs. (ii) competitive prices. (iii) prices from two decades back. (iv) monopoly prices.

i, ii

In the long run, inflation is determined by:

inflation expectations

What would make ypu LEAST likely to raise prices at your coffee-roasting business next year?

lower demand throughout the economy

Shortly after you install more efficient equipment in your coffee roasting business, you read that bad weather in Central America adversely affected the coffee bean harvest. Coffee beans, which account for 50% of your overall costs, are expected to rise in price by 10%. You expect the new equipment to reduce the other half of your costs by 6%. How will you adjust your prices for next year?

you decide to raise them by 2%

Your friend in Argentina texts you that inflation there has averaged 44.6% for the last 10 years. You wonder how it can remain so high and conclude:

inflationay expectations must be locked in solidly there

In the United Kingdom, worries about Brexit have caused consumer confidence to fall. Holding other things equal, this could lead to _____ in the UK economy.

insufficient demand

Rare earth metals are used in the production of many of the personal electronic devices you use every day. Suppose there is an unexpected decrease in the price of rare earth metals. a. The decrease in price of rare earth metals will lead to

negative cost push inflation

Suppose that the unemployment rate rises as the rate of unexpected inflation declines. This situation is consistent with a movement along the _____ labor market Phillips curve.

negatively sloped

When unexpected inflation is zero, the corresponding unemployment rate is the:

non-accelerating inflation rate of unemployment (NAIRU)

If managers use strong macroeconomic knowledge and good forecasts to build their inflation expectations, they have _____ expectations.

rational

You read the financial news inThe Wall Street Journalevery day and subscribe to various government e-mail bulletins about the economy, and you have developed a deep understanding of how macroeconomic variables interact. You are best described as having _____ expectations.

rational

Cost-push inflation is inflation that arises from an unexpected:

rise in production costs

You are surprised to find that the inflation rate is triple what you thought it was. It was low several years ago, and you hadn't really kept track of it, leading to your _____ expectations.

sticky

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in:

the aggregate price level

What does the original Phillips curve illustrate?

the short‑run trade‑off between inflation and unemployment

During the Great Recession of 2007‑2009, the inflation rate fell from 3.83.8% in 2008 to −0.4−0.4% in 2009. During the same period, unemployment rates went from 5.8% to 9.3%. Consider how the change in inflation and unemployment, during this period, compare to the relationships modeled in the Phillips curves. This period demonstrates:

the trade‑off between unemployment and inflation modeled by the simple Phillips curve

There is no long-run trade-off between inflation and output because:

there is a self-fulfilling prophecy of higher inflation expectations leading to higher inflation

In the short run, a lower _____ rate may be achieved at the cost of _____.

unemployment, a higher unexpected inflation rate

Argentina

You work for Starbucks as an economic analyst. According to the information in Figure 1, in which country listed would you recommend the largest increase in prices next year?

Japan

You work for Starbucks as an economic analyst. According to the information in Figure 1, in which country listed would you recommend the smallest increase in prices next year?

franchises in India, as one example, wouldn't be able to cover likely increases in input costs

You work for Starbucks as an economic analyst. Another analyst recommends increasing prices in each country by 2.0%, the median inflation rate for the last 10 years. Based on the information in Figure 1, you disagree because:

2.0% (move to 2.0%)

a. Move point A along the Phillips curve to an output gap of 10%. What is the rate of unexpected inflation when the output gap is 10%?

upwards phillips curve shift

Canada is the world's largest exporter of sawn wood, which is used as an input in products produced by other countries. Cutbacks at Canadian lumber factories caused a rise in lumber prices. How does this affect the Phillips curve in China?

inflation falls below expected inflation

Consider the Phillips curve shown here. In region A:

After several years of current data lying along the same Phillips curve, economists plot the newest statistics and find that their points lie well above the old curve. What is the best explanation?

Increases in the prices of essential raw materials led people to expect higher inflation in the future.

3%

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% above potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power?

1%

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be 3% below potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power?

downward phillips curve shift

Suppose that the U.S. dollar appreciates. Which figure shows the effect on the Phillips curve in the United States?

upward phillips curve shift

Suppose that the euro depreciates. Which figure shows the effect on the Phillips curve in Germany?

According to the labor market Phillips curve, when actual output is _____ potential output, the price level _____, and the unemployment rate falls.

above; increases

Inflation has been low, in the 1%-2% range, recently. If you expect that to continue you have _____ expectations.

adaptive

rightwards shift, movement to (0,-2)

b. Illustrate the effect of the decrease in the price of rare earth metals by making the appropriate adjustments to the Phillips curve.

0.2; 1%

b. The slope of the Phillips curve is __________. This tells you that an increase in the output gap of 5% will increase unexpected inflation by __________.

1%

The accompanying graph depicts the Short-Run Phillips Curve (SRPC) when the public expects no inflation in the economy. a. According to this SRPC, what would inflation be if unemployment is 5%?

5%; increase

The economy is currently producing 5% less output than its potential. In an attempt to boost output, the federal government announces an unexpected stimulus package that you believe will increase output to 5% above potential. b. If expected inflation is 4%, what will total inflation be after the stimulus? c. If you own a business, you should ___________ your prices after the stimulus.

movement to (5,1)

The economy is currently producing 5% less output than its potential. In an attempt to boost output, the federal government announces an unexpected stimulus package that you expect will increase output to 5% above potential. a. Move the point on the Phillips curve to illustrate the relationship between unexpected inflation and the output gap after the stimulus.

movement to (5,0)

The economy is currently producing 5% less output than its potential. In an attempt to boost output, the federal government announces an unexpected stimulus package that you expect will increase output to 5% above potential. b. The initial unemployment rate before the stimulus was 7.5%, and the final unemployment rate afterward is 2.5%. On the labor market Phillips curve, show the equilibrium unemployment rate.

Actual inflation tends to follow inflation expectations.

The figure shows inflation expectations and actual inflation for U.S. consumers over time. Describe the relationship between these rates.

Argentina

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the highest inflation rate was:

France

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the second-lowest inflation rate was:

2%

The graph shows the short‑run Phillips curve (SRPC) when the public expects no inflation in the economy. According to this SRPC, what will inflation be if unemployment is 3%?

upwards movement

The output gap becomes more positive in Canada. Which figure shows the effect on the Phillips curve in Canada?

upwards phillips curve shift

Which figure shows the correct effect on the Phillips curve when the domestic currency depreciates?

downwards phillips curve shift

Which figure shows the correct effect on the Phillips curve when there are falling production costs?

2.0%

You work for Starbucks as an economic analyst. According to the information in Figure 1, by how much would you recommend franchises in Australia should raise prices next year?

When the newest economic data lies to the right of the Phillips curve, that likely means the Phillips curve

has shifted upwards

A wage-price spiral is a cycle in which:

higher prices lead to higher wages, which lead to higher prices

When output exceeds potential output: (i) there is excess demand. (ii) demand-pull inflation occurs. (iii) the output gap becomes negative. (iv) the output gap becomes positive.

i, ii, iv

When output is less than potential output: (i) there is insufficient demand. (ii) demand-pull inflation occurs. (iii) the output gap becomes negative. (iv) the output gap becomes positive.

i, iii

Economists expect inflation to be 2%. Actual inflation ends up being 1.75%. Holding other things equal,if there is no supply-side change in the economy, these statistics indicate inflation is _____% less than expected.

0.25%

If there has been a rightward movement along the Phillips curve, the _____ curve has shifted to the _____.

AD; right

unexpected inflation at -5% and output gap at 5%

Adjust the end points of the Phillips curve to show the relationship between the output gap and unexpected inflation. Assume that the curve goes through point (0,0).

If a manager has an expectation of ongoing inflation, this means she believes that:

cost of inputs will rise

Suppose rubber prices rise in international markets. For countries that import rubber, this scenario would lead to:

cost-push inflation

Excess demand occurs when:

demand is in excess of supply at the market price