Quiz Ch.8.2

C

Assume that expected inflation is based on the following: πet = θπt-1. An increase in θ will cause A) an increase in the natural rate of unemployment. B) a reduction in the natural rate of unemployment. C) no change in the natural rate of unemployment. D) inflation in period t to be more responsive to changes in unemployment in period t.

D

For this question, assume that the Phillips curve equation is represented by the following: πt - πt-1 = (m + z) - αut. Which of the following will not cause an increase in the natural rate of unemployment? A) a reduction in m B) a reduction in z C) an increase in αD) an increase in the expected rate of inflation E) all of the above

B

Use the following Phillips curve equation to answer this question: πt - πt-1 = (m + z) - αut. Which of the following will cause an increase in the natural rate of unemployment? A) a reduction in m B) an increase in z C) an increase in αD) a reduction in expected inflation E) none of the above

D

Assume that expected inflation is based on the following: πet = θπt-1. If θ = 0, we know that A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) high rates of unemployment will cause steadily declining rates of inflation. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate

B

Assume that expected inflation is based on the following: πet = θπt-1. If θ = 1, we know that A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.

Answer: The original Phillips curve broke down in the United States in the 1970s. First, the United States was affected by oil shocks that would cause an increase in both inflation and the unemployment rate. Second, individuals changed the way they formed expectations of prices. Rather than assume that this year's price level would be equal to last year's price level (i.e., zero expected inflation), individuals started to assume that previous inflation would persist.

During which decade did the original Phillips curve break down? Also, briefly explain why the original Phillips curve broke during this period.

Answer: The original Phillips curve did not take into account the effects of changes in expected inflation on inflation. The expectations-augmented Phillips curve did allow for changes in expected inflation to affect actual inflation.

Explain how the original Phillips curve differs from the expectations-augmented Phillips curve (or the modified, or accelerationist Phillips curve).

A

For this question, assume that individuals form expectations of inflation according to the following equation πet = θπt-1. From 1970 on, the value of θ for this equationA) increased over time and approached 1. B) decreased over time and approached zero. C) remained constant at zero. D) remained constant at negative one. E) none of the above

D

For this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. A reduction in the unemployment rate will cause A) a reduction in the markup over labor costs (i.e., a reduction in m). B) an increase in the markup over labor costs. C) an increase in the inflation rate over time. D) a decrease in the inflation rate over time. E) none of the above

E

For this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. Given this information, the natural rate of unemployment will be equal to A) m + z. B) (m + z - α). C) α(m + z). D) 0. E) none of the above

C

For this question, assume that the Phillips curve equation is represented by the following: πt - πt-1 = (m + z) - αut. Which of the following will cause a reduction in the natural rate of unemployment? A) an increase in m B) an increase in z C) an increase in αD) an increase in actual inflation E) an increase in expected inflation

D

For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has greater than the natural rate of unemployment for a number of years. Given this information, we know that A) the rate of inflation will approximately be equal to zero. B) the rate of inflation should neither increase nor decrease. C) the rate of inflation should steadily increase over time. D) the rate of inflation should steadily decrease. E) the inflation rate will be approximately equal to the natural rate of unemployment.

D

In which of the following decades did the Phillips curve break down for the U.S.? A) 1940s B) 1950s C) 1960s D) none of the above

B

Since approximately 1970, the most stable Phillips-type relationship for the United States has been between which of the following? A) the rate of inflation and the change in the unemployment rate B) the unemployment rate and the change in the rate of inflation C) the change in the unemployment rate and the change in the rate of inflation D) the inverse of the unemployment rate and the rate of inflation E) the unemployment rate and the rate of inflation

D

Suppose policy makers underestimate the natural rate of unemployment. In a situation like this, policy makers might implement a policy that A) attempts to maintain output below the natural level of output. B) results in deflation. C) both A and B D) results in steadily rising inflation.

B

The original Phillips curve implied or assumed that A) the markup over labor costs was zero. B) the expected rate of inflation would be zero. C) the actual and expected rates of inflation would always be equal. D) all of the above E) none of the above

E

When inflation has been persistent, as was the case in the United States during the 1970s, low unemployment rates will likely be associated with A) low natural rates of unemployment. B) high natural rates of unemployment. C) low but stable rates of inflation. D) high but stable rates of inflation. E) increases in the inflation rate.

D

When inflation has not been very persistent, as was the case in the United States before the mid-1960s, we can expect that A) the expected price level for a given year will equal the previous year's actual price level. B) the current inflation rate will not depend heavily on past years' inflation rates. C) lower unemployment rates will be associated with higher inflation rates. D) all of the above E) none of the above

B

Which of the following assumptions best characterized the assumption about how individuals formed expectations of inflation by the early 1970s? A) Expected inflation for the current year was smaller than the previous year's inflation rate. B) Expected inflation for the current year was approximately equal to the previous year's inflation rate. C) Expected inflation for the current year was less than the previous year's inflation rate. D) Expected inflation for the current year equal to the average inflation rate over the past five years. E) Expected inflation for the current year equal to the average inflation rate over the past ten years.