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.