Macroeconomics Chapter 16 Practice problems part 2

If potential output is $12 trillion and actual output is $13 trillion, then there is a(n) _____ gap.

inflationary

When the output gap is positive, the unemployment rate:

is below the natural rate.

If potential output is $12 trillion and actual output is $13 trillion, then the actual unemployment rate:

is lower than the natural rate.

In the figure, if the economy is in equilibrium at point C, then according to the classical model, a decrease in the money supply will result in a new equilibrium at:

point A

Expected inflation refers to the:

rate of inflation that workers and employers expect in the near future.

If potential output is $16 trillion and actual output is $15 trillion, then there is a(n) _____ gap.

recessionary

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

recessionary; higher

The public responds to increasing rates of inflation by:

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

In order for governments to collect real seigniorage:

the price level must increase.

Suppose the natural rate of unemployment is 4.7% and that the economy is currently producing at 104% of potential output. Using Okun's law, the unemployment rate is _____%

2.7 (Hint stuff: Consider that Okun's law calls for the unemployment rate to change negatively by about half of the change in the output gap. According to Okun's law, the unemployment rate will change negatively by about half of the change in the output gap.Okun's law refers to the negative relationship between the output gap and the unemployment rate; it is estimated that a rise in the output gap of 1% reduces the unemployment rate by about 0.5%.)

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

3; 6 (Hint: Consider that unemployment moves in the opposite direction of output and GDP growth, but at a slower rate due to labor laws. Okun's law for the United States estimates that for a 1% increase in the output gap there will be a reduction in the unemployment rate of 0.5%.

Which statement explains why the Phillips curve was constructed without taking expected inflation into account?

Prior to 1965, most people had become accustomed to low inflation rates and reasonably expected them to stay low in the future.

_____ refers to the negative short-run relationship between the unemployment rate and the inflation rate.

The short-run Phillips curve

In the figure, if the economy is in equilibrium at point A, then according to the classical model, an increase in the money supply will result in output of _____, and prices of _____.

YP; P4

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

aggregate demand curve shifted to the right.

According to the AD-AS model and the short-run Phillips curve, if aggregate demand decreased, then the inflation rate would _____ and unemployment would _____.

decrease; increase

Which factor did NOT contribute to stagflation in the United States in the 1970s and early 1980s?

decreasing prices of raw materials, leading to a downward shift of the short-run Phillips curve

In the classical model, an increase in the money supply leads to _____ prices and _____ in output.

higher; no change

The classical model is:

more accurate in periods of high inflation than in periods of low inflation.

In the long run, a decrease in the inflation rate will lead to:

no change in the unemployment rate.

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

not change.

In the United States, if there is a decrease in the expected inflation rate of 2%, then the short-run Phillips curve will _____ and the actual inflation rate will _____.

shift downward; decrease by 2%