Ch. 16: Inflation, Disinflation, and Deflation

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

The nominal interest rate on a one-year loan for $1,000 is 8%. The lender expected inflation of 2% during the year; however, deflation of 3% occurred. The lender of this loan expected a real interest rate of _____%.

6

The nominal interest rate on a one-year loan for $5,000 is 10%. The lender expected inflation of 2% during the year; however, inflation of 3% occurred. The lender of this loan expected a real interest rate of _____%

8

The core inflation rate excludes all of the following EXCEPT: -Oil -Natural Gas -Food

Clothing

_____ occurs when the Federal Reserve prints money to buy government debt back from the public through open-market operations

Monetizing the debt

_____ can occur when the government spends more than its revenue and turns to printing money to cover its deficit.

The inflation tax

In this graph, SRPC1 is the initial short-run Phillips curve for this economy when the expected inflation rate equals 0%. Suppose the policy makers for this economy decide to pursue an unemployment rate of 2%. This will cause _____ inflation in the long run.

accelerating

The economy would move up along a short-run Phillips curve to a lower unemployment rate and a higher inflation rate if the:

aggregate demand curve shifted to the right.

Borrowers who owe money lose during times of deflation:

because the real burdens of the debts increase.

The nominal interest rate on a one-year loan for $1,000 is 8%. The lender expected inflation of 2% during the year; however, deflation of 3% occurred. In this case, the lender:

benefited, and the borrower was hurt.

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

decrease; increase

One of the costs of disinflation is:

decreased real gross domestic product.

The process of bringing down inflation that has become embedded in expectations is known as:

disinflation.

An economy will experience a liquidity trap when the Federal Reserve:

finds that it cannot reduce nominal interest rates, even if it engages in open-market purchases of Treasury bills.

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

higher; no change

When the output gap is positive, the unemployment rate:

is below the natural rate.

If potential output is $16 trillion and actual output is $15 trillion, then the actual unemployment rate MOST likely:

is greater than the natural rate.

If potential output is $16 trillion and actual output is $18 trillion, then the actual unemployment rate MOST likely:

is less than the natural rate.

In the classical model, a decrease in the money supply leads to _____ prices and _____ in real GDP.

lower; no change

The _____ of unemployment is another name for the nonaccelerating inflation rate of unemployment.

natural rate

According to the text, in the long run, an increase in the inflation rate will lead to:

no change in the unemployment rate.

An economy is experiencing persistently high inflation. According to the classical model, an increase in the money supply will have:

no effect on the real quantity of money, making money neutral in the long run.

Debt deflation:

occurs when borrowers reduce their aggregate spending, because the deflation increases the debt burden that borrowers experience.

An increase in expected inflation:

of 2% will push the actual inflation rate at any given unemployment rate up by 2%.

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%

All of the following are true regarding an inflation tax EXCEPT that it: -occurs when the government prints money to cover its budget deficit. -is a tax on those who hold money that occurs when inflation erodes the purchasing power of their money. -means that people who currently hold money pay for the goods and services the government purchases with newly printed money.

ultimately decreases the quantity of the money supply after an initial spike.

The economy would move _____ a short-run Phillips curve if the aggregate demand curve shifts _____.

up; to the right

The long-run Phillips curve is _____ at the nonaccelerating inflation rate of unemployment.

vertical

The nominal interest rate on a one-year loan for $1,000 is 8%. The lender expected inflation of 2% during the year; however, deflation of 3% occurred. The lender of this loan actually received a real interest rate of _____%.

11

In this graph, SRPC1 is the short-run Phillips curve for this economy when the expected inflation rate equals 0%. Using the graph, the short-run Phillips curve (SRPC) equals SRPC2 when the expected inflation rate equals _____%.

2

Suppose the expected and actual inflation rate is currently 2% and the NAIRU (nonaccelerating inflation rate of unemployment) is 6%. The actions of policy makers drive inflation up to 4% and unemployment down to 4%. Which is most likely to occur if no further action is taken?

Eventually, the public will come to expect an inflation rate of 4% and the economy will shift back to 6% unemployment.

Suppose the expected and actual inflation rate is currently 4% and the NAIRU (nonaccelerating inflation rate of unemployment) is 4%. The actions of policy makers drive inflation up to 6% and unemployment down to 2%. Which will MOST likely occur if no further action is taken?

Eventually, the public will come to expect an inflation rate of 6%, and the economy will shift back to 4% unemployment.