Econ 2: Chapter 16 Inflation, Disinflation, Deinflation

If actual output is greater than potential output, then there is a(n) _____ gap and the actual unemployment rate is _____ than the natural rate.

inflationary; lower

Potential output is the level of gross domestic product that the economy produces when the actual unemployment rate _____ the natural rate of unemployment, and all prices have fully adjusted.

is equal to

A central bank finds that it cannot use monetary policy to reduce the nominal interest rate. MOST likely, that economy:

is operating in a liquidity trap.

All of the following are true regarding moderate inflation EXCEPT that:

it may be caused by a shift of the aggregate supply curve to the right.

When the _____ gap is positive, the unemployment rate is below the natural rate.

output

During hyperinflation, a government MOST likely decides to:

print money in order to collect real seignorage.

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

The public responds to increasing rates of inflation by:

reducing its real money holdings as fast as possible before its holdings become devalued.

debt deflation

the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deinflation

inflation tax

the reduction in the value of money held by the public caused by inflation

long-run Phillips curve

the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

nonaccelerating inflation rate of unemployment (NAIRU)

the unemployment rate at which inflation does not change over time

If there is an increase in the expected inflation rate of 4 percent, then the short-run Phillips curve will shift _____ and the actual inflation rate will _____.

upwards; increase by 4 percent

liquidity trap

when conventional monetary policy is ineffective, because nominal interest rates are up against the zero bound

In 2014, the European Central Bank reduced one of its key policy rates, the interest rate it pays on deposits of private banks, to _____ percent.

-0.1

According to Okun's law, when the cyclical unemployment rate decreases by _____ percent in the United States, the output gap will have increased by _____ percent.

3: 6

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

Leads to an equal percentage increase in the overall price level

Which statement involves a feature of the classical model of the price level?

The real quantity of money is always at its long-run equilibrium level.

classical model of the price level

a simplified financial model of the price level in which the real quantity of money, M/P, is always at its long-run equilibrium level. This model ignores the distinction between the short run and the long run but is useful for analyzing the case of high inflation.

The economy would move down a fixed Phillips curve to a higher unemployment rate and a lower inflation rate if the:

aggregate demand curve shifts to the left.

A negative supply shock often results in:

an increase in the aggregate price level and a decrease in aggregate output.

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 core inflation rate excludes all of the following EXCEPT:

clothing

When _____ occurs, lenders benefit.

deflation

If nominal wages are slow to adjust to changes in the price level, then the effect of an increase in the money supply is to:

increase real GDP only in the short run, and raise the price level in the long run.

The slope of the long-run Phillips curve is:

infinite.

The _____ of unemployment is another name for the nonaccelerating inflation rate of unemployment.

natural rate

An economy is in equilibrium at the natural rate of unemployment, and the level of taxation increases. In the long run, the natural rate of unemployment MOST likely will:

not change

Okun's law

the negative relationship between the output gap and the unemployment rate, whereby each additional percentage point of output gap reduces the unemployment rate by about ½ of a percentage point.

short-run Phillips curve

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

zero bound

the nominal interest rate: it cannot go below zero