Econ Quiz 9 FINAL

Suppose that the Phillips curve is given by πt − πet = 0.1 − 2 ut​, where πet=πt−1 Suppose that inflation in year ​(t−​1) is zero. In year t​, the central bank decides to keep the unemployment rate at​ 4% forever.

(Answers below)

Suppose that the Phillips curve is given by πt − πet = 0.1 − 2 ut​, where πet=πt−1 Suppose that inflation in year ​(t−​1) is zero. In year t​, the central bank decides to keep the unemployment rate at​ 4% forever. Now suppose that half the workers have indexed labor contracts.

(Answers below)

Suppose that the Phillips curve is given by πt−πet=0.08+0.1 μt−2 ut where μ is the markup of prices over wages. Suppose that μ is initially equal to​ 20%, but that as a result of a sharp increase in oil​ prices, μ increases to​ 40% in year t and after.

(Answers below)

If you look mainly at what the inflation rate was last year when trying to predict what inflation will be this​ year, then you believe that θ is near 1

1

The equation of the Phillips curve from 1970 to 1995​ is: πt−πt−1=7.4−1.2 ut . The natural rate of unemployment using this curve is 6.2​%

6.2%

What is the effect of wage indexation on the relation between π and u​? A. As indexation​ rises, inflation becomes more sensitive to the gap between the unemployment rate and natural rate. This is the correct answer. B. As indexation​ increases, inflation becomes more sensitive to the actual level of the unemployment rate. C. As indexation​ rises, inflation becomes less sensitive to the gap between the unemployment rate and natural rate. D. As indexation​ increases, inflation becomes less sensitive to the actual level of the unemployment rate.

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

What do we know about your process of the formation of expected inflation when θ ​= 0? A. Regardless of what inflation was last​ year, you would expect it to be at the​ long-run average inflation rate this year. Your answer is correct. B. Last​ year's inflation rate will influence you to revise your estimates for this​ year's expected rate. C. Neither last​ year's inflation rate nor the​ long-run average inflation rate impact your view on this​ year's expected rate. D. Last​ year's inflation rate and the​ long-run average inflation rate have an equal impact on your view of this​ year's expected rate.

A. Regardless of what inflation was last​ year, you would expect it to be at the​ long-run average inflation rate this year.

As the proportion of labor contracts that index wages to prices​ declines, we would expect​ that: A. a reduction in the unemployment rate will now have a smaller effect on inflation Your answer is correct. B. the natural rate of unemployment will increase C. the natural rate of unemployment will decrease D. nominal wages will become more sensitive to changes in unemployment

A. a reduction in the unemployment rate will now have a smaller effect on inflation

Under wage​ indexation, the change in the inflation equation becomes πt − πt−1 = − α(1−λ) ut − un​, where λ is the proportion of contracts that are indexed. 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. A. higher​; larger Your answer is correct. B. lower​; larger C. higher​;

A. higher​; larger

In the late​ 1960s, the economists Milton Friedman and Edmund Phelps said A. that the​ inflation-unemployment tradeoff could not be sustained below the natural rate of unemployment. Your answer is correct. B. that the natural rate of unemployment would fall if inflation was high enough. C. that there was no relationship between inflation and unemployment. D. that policymakers could achieve as low a rate of unemployment as they wanted.

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

What do we know about your process of the formation of expected inflation when θ ​= 1? A. Neither last​ year's inflation rate nor the​ long-run average inflation rate impact your view on this​ year's expected rate. B. 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. Your answer is correct. C. Regardless of what inflation was last​ year, you would expect it to be at the​ long-run average inflation rate this year. D. Last​ year's inflation rate and the​ long-run average inflation rate have an equal impact on your view of this​ year's expected rate.

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

B. Wage indexation becomes more likely to be used during periods of high inflation. C. Wage indexation allows​ workers' wages to increase automatically in line with inflation.

Now suppose that half the workers have indexed labor contracts. Which of the following represents the new equation for the Phillips​ curve? A. πt = πet + 4ut − 0.05 B. πt = πet − 4ut − 0.05 Your answer is correct. C. πt = πet + 0.1 − 2 ut D.

B. πt = πet − 4(ut − 0.05)

Which of the following would not lead to a decrease in the actual inflation​ rate? A. A decrease in expected inflation. B. A decrease in the factors that affect wage determination. C. An increase in the nominal wage. Your answer is correct. D. A decrease in the markup.

C. An increase in the nominal wage.

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. A. True. The Phillips curve implies a​ trade-off between inflation and​ unemployment, so both cannot be high together. B. Uncertain. The Phillips curve does not hold for all countries and​ times, so any relationship could be observed. C. False. If inflation expectations are​ high, it is possible to have high inflation and high unemployment simultaneously. Your answer is correct. D. False. In the medium​ run, the unemployment rate must equal the natural​ rate, regardless of the level of inflation.

C. False. If inflation expectations are​ high, it is possible to have high inflation and high unemployment simultaneously.

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. A. True. Inflation will be high because unemployment is below the natural​ rate, but unemployment can be kept low. B. False. It is not possible to have an unemployment rate that is below the natural rate of unemployment. C. False. This would require not merely high inflation but​ ever-increasing inflation because expectations adjust. Your answer is correct. D. Uncertain. It depends on the willingness of consumers and businesses to tolerate high inflation.

C. False. This would require not merely high inflation but​ ever-increasing inflation because expectations adjust.

The equation of the Phillips curve from 1996 to 2018​ is: πt=2.8%−0.16ut . Which of the following explains why the natural rate of unemployment cannot immediately be calculated from the Philips​ curve? A. The expression only provides (m+z) and α. B. The expression only provides πe and α. C. The equation does not include a specific value for expected inflation. Your answer is correct. D. None of the above.

C. The equation does not include a specific value for expected inflation.

What is the effect of the increase in μ on the natural rate of​ unemployment? A. The natural rate of unemployment will decrease. B. The natural rate of unemployment will not change. C. The natural rate of unemployment will increase. Your answer is correct. D. The effect on the natural rate of unemployment cannot be determined without more information

C. The natural rate of unemployment will increase.

Suppose policy makers overestimate the natural rate of unemployment. In situations like​ these, policy makers will likely implement policies that result​ in: A. a steadily increasing inflation rate. B. an unemployment rate that is​ "too low." C. a lower inflation rate than necessary. Your answer is correct. D. less unemployment than necessary. E. overly expansionary monetary and fiscal policy.

C. a lower inflation rate than necessary.

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 should neither increase nor decrease. B. the rate of inflation will approximately be equal to zero. C. the rate of inflation should steadily decrease. Your answer is correct. D. the inflation rate will be approximately equal to the natural rate of unemployment. E. the rate of inflation should steadily increase over time.

C. the rate of inflation should steadily decrease.

Why would an increase in oil prices result in an increase in μ​? A. A higher cost of production changes the natural rate of unemployment. B. A higher cost of production changes inflationary expectations and thus the markup. C. A higher cost of production means changes in​ technology, which will alter the markup. D. A higher cost of production means a higher markup of the price level over wages. correct answer

D. A higher cost of production means a higher markup of the price level over wages.

What are the possible explanations for the change in the natural rate of unemployment between the 1980s and the​ 2000s? A. The population has aged. B. There could be more efficient search mechanisms in the labor force. C. Workers could have weaker bargaining power. D. All of the above. correct answer

D. All of the above.

In the Phillips curve​ equation, which of the following will cause an increase in the current inflation​ rate? A. an increase in the expected inflation rate B. an increase in the​ markup, m C. a reduction in the unemployment rate D. all of the above Your answer is correct. E. none of the above

D. all of the above

The​ expectations-augmented Phillips curve A. allows policymakers to achieve as low a rate of unemployment as they desire. B. assumes that the expected rate of inflation is zero. C. has proven to be very stable across countries and over time. D. is consistent with workers and firms adapting their expectations after the macroeconomic experience of the 1960s. correct answer

D. 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 A. takes into account worker expectations about inflation. B. relation has proven to be very stable across countries and over time. C. applies only to European countries. D. is the negative relation between unemployment and inflation first observed in the United Kingdom. correct answer

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

Given what you found​ above, you can see that expected inflation can impact actual inflation through its effects on​ _______. A. the unemployment​ rate, u. B. the​ markup, m. C. outside​ factors, z. D. nominal​ wages, W. correct answer

D. nominal​ wages, W.

Policymakers can exploit the​ inflation-unemployment trade-off A. in the medium run but not in the short run. B. to achieve any desired combination of inflation and unemployment. C. only if the expected rate of inflation is zero. D. only​ temporarily, because expectations adapt to higher levels of inflation. correct answer

D. only​ temporarily, because expectations adapt to higher levels of inflation.

Using the line drawing tool​, accurately graph the Phillips relation πt=2.8%−0.16ut with inflation on the vertical axis and unemployment on the horizontal axis.

Draw STRAIGHT line from 2.8 down to 17.5

Which of the following explains why the original Phillips curve relation disappeared​ or, as some economists have​ remarked, "broke​ down" in the​ 1970s? A. more labor contracts became indexed to changes in inflation. B. individuals assumed the expected price level for the current year would be equal to the actual price level from the previous year. C. individuals assumed that expected inflation would be zero D. monetary policy became contractionary. E. individuals changed the way they formed expectations of inflation. correct answer

E. individuals changed the way they formed expectations of inflation.

Expected inflation always equals actual inflation. False

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

False

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

False

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

False

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

False

Deflation means that the rate of inflation is negative. True

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

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

True

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

True

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

True

Given these​ equations, what do you know about the relationship between the expected price and the​ price? An increase in the expected price will result in an increase in prices.

an increase

What is the natural rate of unemployment using the relation πt=2.8%−0.16ut under the assumption that the value of π=2% The natural rate of unemployment fell to 5​% between​ 1970-1995 and​ 1996-2018?

fell, 5%

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.

increased, quicker, even more

In year t​, the inflation rate will be 2​%. In year ​(t​ + 1), the inflation rate will be 4​%. In year ​(t​ + 2), the inflation rate will be 6​%. ​ In year ​(t​ + 3), the inflation rate will be 8​%

t= 2% (t+1)= 4% (t+2)= 6% (t+3)= 8%

Now, in year t​, the inflation rate will be 4​%. In year ​(t​ + 1), the inflation rate will be 8​%. ​ In year ​(t​ + 2), the inflation rate will be 12​%. In year ​(t​ + 3), the inflation rate will be 16​%

t= 4% (t+1)= 8% (t+2)= 12% (t+3)= 16%