Ch. 16 - Lori
If the real money supply is $500 billion and the money supply grows by 2%, then real seignorage is:
$10 billion.
If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:
$180 million.
Okun's law suggests that a _____ increase in a positive output gap _____ the unemployment rate by _____.
0.5% ; increases; 1% (WRONG)
If the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full-employment level of output, in the long run the aggregate price level increases by _____ and real GDP _____.
10%; returns to the potential level of output
According to recent estimates of Okun's law, if the unemployment rate FELL by a full percentage point, it would most probably be attributable to a _____ in real GDP.
2% increase
(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at AD-AS Model and the Short-Run Phillips Curve. If the central bank increases the money supply so that aggregate demand shifts from AD1 to AD2, then the inflation rate will be:
2%.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014, the actual unemployment rate was approximately:
5% (WRONG)
Look at the figure Actual and Natural Rates of Unemployment. In 2014, the actual unemployment rate was approximately:
6%
The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of:
9% (WRONG)
Refer to the figure AD-AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy, _____ will shift to _____ and the economy will move from _____. Then nominal wages will _____ and _____ will shift to _____. The economy will move from _____.
AD1; AD2; E1 to E2; rise very quickly; SRAS1; SRAS2; from E2 to E3
If there has been a downward movement along the fixed short-run Phillips curve, the _____ curve has shifted to the _____.
AD; left
If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the _____.
AD; right (WRONG)
Which of the following accurately describes disinflation?
It is reduction of the inflation that has become embedded in expectations
An economy's short-run Phillips curve will shift up in response to:
a) an increase in expected inflation.
f government decides to print money to finance a deficit:
a) borrowers will be penalized because they will owe more as inflation increases. WRONG
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC1 is based on an expected inflation rate of:
a) zero.
Look at the scenario Assets and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the Fed buys $25,000 worth of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be added to the money supply.
about $667,000 WRONG
If potential output is higher than actual output, then the unemployment rate is:
above the natural rate.
If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.
c) ineffective; ineffective WRONG
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, real GDP will:
c) not change.
Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:
equal to the natural rate of unemployment.
When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would:
fall into a deflationary trap.
In the long run, an increase in aggregate demand from a position of full employment leads to:
higher prices and the same output
Deflation:
hurts borrowers and helps lenders.
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the equilibrium point will:
immediately move from E1 to E3.
The unemployment rate will fall if potential output growth is:
lower than actual output growth.
Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in inflation.
no change; an increase
During an inflationary gap:
the unemployment rate is less than the natural rate of unemployment.
(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. SRAS1 will shift to SRAS2 because:
aggregate real output rises in the long run. WRONG
Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _____, it can be argued that _____ is (are) better off.
b) below 3%; Adrianna
According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 4%, and the expected rate of inflation is 5%, then the unemployment rate is:
d) 2.5%.
If a central bank pursues an expansionary monetary policy:
d) the aggregate price level and level of real GDP will increase in the short run.
During periods of low inflation, the short-run aggregate supply curve is:
d) upward sloping.
If the natural rate of unemployment _____, the nonaccelerating inflation rate of unemployment _____, and the long-run Phillips curve shifts to the left.
falls; falls
According to the classical model of the price level, an increase in the money supply will cause _____ and _____ increase in real GDP.
inflation; no long-run
Deflation leads to winners and losers; for example:
mortgage holders lose, but banks awaiting mortgage payments benefit.
A government with a large deficit will also produce high inflation in the economy if it:
reduces government spending (WRONG)
Figure: Expected Inflation and the Short-Run Phillips Curve SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%. (Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:
rise to 4%. (WRONG)
When workers and firms become aware of a rise in the general price level:
they will incorporate higher prices into their expectations.
(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Finally the economy moves to E3. The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____.
E1 to E3, ignoring E2; increases; remains the same
In the long run, an increase in the money supply:
results in no change in real GDP.
During periods of low inflation, the short-run aggregate supply curve is:
upward sloping.
According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 4%, and the expected rate of inflation is 5%, then the unemployment rate is:
2.5%
According to recent estimates of Okun's law, if the unemployment rate FELL by a full percentage point, it would most probably be attributable to a _____ in real GDP.
3% increase WRONG
Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio.
d) negatively; less than one-to-one
Figure: Expected Inflation and the Short-Run Phillips Curve SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%. (Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:
fall to -2%
(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:
fall to -2%. WRONG
Figure: Expected Inflation and the Short-Run Phillips Curve SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%. (Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:
fall to zero.
In economies with persistently high inflation, an increase in the money supply will have:
no effect on the real quantity of money, making money neutral in the long run.
If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:
not change
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the SRAS will:
not change, since in the classical model the SRAS and LRAS are both vertical at potential output.
Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio.
negatively; less than one-to-one
Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.
90, 900
(Figure: AD-AS) Refer to the figure AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that _____ will shift to _____ and the economy will move from _____.
AD1; AD2; E1 to E2
If the short-run Phillips curve has shifted downward, the _____ curve has shifted to the _____.
AD; left (WRONG)
Workers in country A have wage contracts for cost-of-living adjustments (COLAs), which adjust wages to offset the effect of inflation, and workers in country B do NOT. When the central banks of countries A and B increase the money supply:
COLAs have no effect on the speed of price changes. WRONG
If the natural rate of unemployment _____, the nonaccelerating inflation rate of unemployment _____, and the long-run Phillips curve shifts to the left.
If the real money supply is $500 billion and the money supply grows by 2%, then real seignorage is:falls; rises WRONG
(Figure: AD-AS Model) Look at the figure AD-AS Model. Suppose the economy is at YE with a price level of P1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply?
Y1 and P2 (WRONG)
Which of the following is near-money?
a savings account
(Table: Combinations of Unemployment and Inflation) Look at the table Combinations of Unemployment and Inflation. Which of the following combinations could lie on the same long-run Phillips curve?
a) W and Y
According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls.
a) above; increases
The measure that the Fed regards as the best guide to underlying inflation is the:
a) core inflation rate.
According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls.
above; increases
When an economy has debt deflation:
aggregate demand decreases as borrowers' real debts increase, which leads to less spending.
In the classical model, it is thought that the long-run:
aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping. (WRONG)
Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?
an increase in the number of discouraged workers.
Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in inflation.
b) no change; an increase
If an administration pursues expansionary policy before an election to bring down unemployment, it can:
b) produce inflation if the targeted rate of unemployment is too low.
Expecting the inflation rate to be 3%, Adrianna decides to put her savings in bonds yielding a fixed 5% interest rate over a year. If the actual inflation rate is _____, it can be argued that _____ is (are) better off.
below 3%; Adrianna
Who loses when there is unexpected deflation?
borrowers
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the price level will:
increase from P1 to P3.
As people try to avoid the inflation tax, the government must _____ the inflation rate to _____.
increase; raise the same revenue from inflation
If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.
ineffective; effective
Each point on a Phillips curve is a different combination of:
inflation and unemployment.
If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:
inflation will increase
Look at the figure The Great Disinflation. In the early 1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary policy. In the short run this policy led to a _____ level of actual output and a _____ rate of unemployment.
low, high
(Figure: The Great Disinflation) Look at the figure The Great Disinflation. In the early 1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary policy. In the short run this policy led to a _____ level of actual output and a _____ rate of unemployment.
low; high
Figure: The Great Disinflation) Look at the figure The Great Disinflation. In the early 1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary policy. In the short run this policy led to a _____ level of actual output and a _____ rate of unemployment.
low; high
Look at the figure Actual and Natural Rates of Unemployment. In 2000 the output gap was:
mpossible to determine without more information. WRONG
If government decides to print money to finance a deficit:
people who hold money will be penalized as inflation increases.
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014 the output gap was:
positive (WRONG)
When the output gap is _____, reflecting an inflationary gap, the unemployment rate is _____ the natural rate of unemployment.
positive; below
The Fed monetizes the debt when it:
prints money and buys government debt from the public.
Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of inflation. The SRAS curve will shift to the _____, and the short-run Phillips curve will shift _____.
right; downward
Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will:
shift down.
The negative relationship between the inflation rate and the unemployment rate is known as the:
short-run Phillips curve.
If the Fed increases the monetary base by $40 billion through open-market operations:
the U.S. government debt held by the public has been reduced by $40 billion.
If a central bank pursues an expansionary monetary policy:
the aggregate price level and level of real GDP will increase in the short run.
Historically, governments have turned to seignorage to pay their bills when:
the government lacks the will to reduce the budget deficit by raising taxes or reducing spending.
Zimbabwe's economic instability was caused primarily by:
the government's seizure of the country's farms, which disrupted production.
Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their reelection because:
the political benefits are immediate and the economic costs are delayed.
An inflation tax is:
the reduction in purchasing power due to inflation.
As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason:
the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship.
To avoid accelerating inflation over time, a government's policy should _____ to trade off lower unemployment for higher inflation rather than _____.
try; accept a lower unemployment rate so that the actual inflation rate is less than the expected inflation rate (WRONG)
The long-run Phillips curve shows the relationship between:
unemployment and inflation after expectations of inflation have had time to adjust to experience.
As people get used to inflation:
wages adjust faster, and the short-run aggregate supply shifts quickly to the left.
(Figure: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC1 is based on an expected inflation rate of:
zero
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 1982, the actual unemployment rate was approximately:
zero. (WRONG)