ch 16

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%

If government decides to print money to finance a deficit:

people who hold money will be penalized as inflation increases.

When the output gap is _____, reflecting an inflationary gap, the unemployment rate is _____ the natural rate of unemployment.

positive; below

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

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.

During periods of low inflation, the short-run aggregate supply curve is:

upward sloping.

If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:

$180 million.

Look at the figure Actual and Natural Rates of Unemployment. In 2014, the actual unemployment rate was approximately:

6%

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

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

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

Who loses when there is unexpected deflation?

borrowers

If potential output is higher than actual output, then the unemployment rate is:

equal to the natural rate. WRONG

If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:

inflation will increase

If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.

ineffective; effective

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

Deflation leads to winners and losers; for example:

mortgage holders lose, but banks awaiting mortgage payments benefit.

Look at the figure Actual and Natural Rates of Unemployment. In 2000 the output gap was:

mpossible to determine without more information. WRONG

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

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.

Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will:

shift down.

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.