Chapter 8

If you look mainly at what the long−run trends have been for inflation when trying to predict what inflation will be this​ year, then you believe that θ is near

0

Which of the following are true regarding wage​ indexation? A. Wage indexation becomes more likely to be used during periods of high inflation. B. It allows firms to benefit at the expense of workers with indexed contracts when inflation is higher than expected. C. Wage indexation allows​ workers' wages to increase automatically in line with inflation. D. It allows workers with indexed wages to benefit at the expense of firms when inflation is higher than expected.

A and C

What is the effect of wage indexation on the relation between π and u​?

As indexation​ rises, inflation becomes more sensitive to the gap between the unemployment rate and natural rate.

How does the natural rate of unemployment vary with the catchall term z​?

As the catchall term z​ increases, the natural rate of unemployment increases

Identify how m and z may explain variations in the natural rate of unemployment across countries and across time.

Differences in both m and z can explain variation across countries and across time.

Expected inflation always equals actual inflation.

False

In the late​ 1960s, the economists Milton Friedman and Edmund Phelps said that policy makers could achieve as low a rate of unemployment as they wanted.

False

The natural rate of unemployment is constant over time within a country.

False

The natural rate of unemployment is the same in all countries.

False

The original Phillips curve relation has proven to be very stable across countries and over time.

False

Consider the following​ statement: The Phillips curve implies that when unemployment is​ high, inflation is​ low, and vice versa.​ Therefore, we may experience either high inflation or high​ unemployment, but we will never experience both together. Is this statement​ true, false, or​ uncertain? Choose the answer that best explains

False. If inflation expectations are​ high, it is possible to have high inflation and high unemployment simultaneously. In the​ 1970s, we experienced high inflation and high unemployment. The​ expectations-augmented Phillips curve is a relationship between inflation and unemployment conditional on the natural rate and inflation expectations. Given inflation​ expectations, when the natural rate of unemployment increases​ (i.e., when there is an increase in z or m​), there is also an increase in both the actual unemployment rate and the inflation rate. In​ addition, increases in inflation expectations imply higher inflation for any level of unemployment. In the​ 1970s, both the natural rate and expected inflation​ increased, so both unemployment and inflation were relatively high.

Consider the following​ statement: As long as we do not mind having high​ inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by​ using, for​ example, expansionary fiscal policy. Is this statement​ true, false, or​ uncertain? Choose the answer that best explains.

False. This would require not merely high inflation but​ ever-increasing inflation because expectations adjust. The​ expectations-augmented Phillips curve implies that maintaining a rate of unemployment below the natural rate requires not merely high inflation but increasing inflation. This is because inflation expectations continue to adjust to actual inflation.

What do we know about your process of the formation of expected inflation when θ = 1?

Last​ year's inflation rate will be the only input for you to revise your estimates for this​ year's expected rate regardless of what the​ long-run average inflation rate is.

Which of the following provides the best intuition as to why indexation impacts inflation in the way that you determined​ above?

Lower unemployment leads to increased​ wages, which in turn lead to increased prices. The higher the proportion of wage contracts that are​ indexed, the quicker wages can​ adjust, causing even more increases in prices during the year.

Professor Blanchard discusses the effects of the slowdown in growth. He notes that it is​ "striking" that this slowdown has not come with a decrease in inflation​ - a result that should occur based on the predictions of the Phillips curve. Which of the following is the explanation provided by Professor Blanchard for why inflation has not fallen as output growth has​ fallen?

Potential output growth has decreased.

What happens to inflation when θ = 1 and unemployment is kept at the natural rate of​ unemployment?

The inflation rate stays constant from one year to the next.

In the previous​ chapter, we derived the natural rate of unemployment. What condition on the price level and the expected price level was imposed in that​ derivation?

The natural rate is the unemployment rate at which the actual price level is equal to the expected price level.

In response to the question about further monetary policy easing and the possibility of an increase in​ inflation, Professor Blanchard does NOT make which of the following​ comments?

The unemployment rate in the Eurozone is now below the natural rate​ and, based on the Phillips​ curve, we anticipate an increase in Eurozone inflation.

What happens to inflation when θ ​= 1 and unemployment is kept below the natural rate of​ unemployment?

There will be an increasing inflation rate.

Deflation means that the rate of inflation is negative.

True

For some periods of​ history, inflation has been very persistent between adjacent years. In other periods of​ history, this​ year's inflation has been a poor predictor of next​ year's inflation.

True

If people assume that inflation will be the same as last​ year's inflation, the Phillips curve relation will be a relation between the change in the inflation rate and the unemployment rate.

True

Policy makers can exploit the​ inflation-unemployment trade-off only temporarily.

True

The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kingdom.

True

How does the natural rate of unemployment vary with the​ markup?

When the markup​ increases, the natural rate of unemployment will increase.

While still​ positive, predicted output growth for emerging market economies was revised down. Changes in which of the following variables is believed to be the cause of the downward revision in predicted output​ growth? A. consumption B. exports C. investment D. all of the above

all of the above

From this​ equation, you can see that the​ ________ the proportion of wage contracts that are​ indexed, the​ ________ the effect that the unemployment rate has on the change in inflation.

higher; larger

The​ expectations-augmented Phillips curve

is consistent with workers and firms adapting their expectations after the macroeconomic experience of the 1960s.

Which of the following is a true statement about the Phillips curve​ relationship? The original Phillips curve

is the negative relation between unemployment and inflation first observed in the United Kingdom.

In the late​ 1960s, the economists Milton Friedman and Edmund Phelps said

that the​ inflation-unemployment tradeoff could not be sustained below the natural rate of unemployment.