Econ 102

As a result of the supply​ shock, the rate of inflation has

increased

NAIRU is the

nonaccelerating inflation rate of unemployment.

​Cross-country evidence supports that the more independent a​ country's central​ bank,

the lower its inflation rate.

We can tell whether a monetary policy has worked by

the state of the economy.

When Lucas made the comment about​ "the monetary theory we​ have," he meant the

rational expectations theory.

Models that use​ factors, such as technology​ shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models.

Which of the following will not have an effect on the long−run Phillips curve​?

Changes in monetary policy.

This statement in​ Goodyear's annual report illustrates the concern that many businesses had regarding the Federal​ Reserve's policy to

raise interest rates because the inflation rate was below the target rate.

The short−run Phillips curve​ is:

Downward Sloping

When Taylor refers to a​ "rules-based policy," he means

a formulaic strategy for targeting the money supply and the federal funds rate.

Higher interest rates would have

decreased investment spending by firms and home purchases.

Milton Friedman argued that the Phillips curve did not represent a permanent​ trade-off between unemployment and​ inflation, since

the​ long-run Phillips curve is​ vertical, there is no​ trade-off between unemployment and inflation in the long run.

​Therefore, during the​ 1970s, there

was not a​ trade-off between unemployment and inflation.

The​ short-run Phillips curve exhibits a trade-off between inflation and unemployment

whereas the​ long-run Phillips curve shows no trade-off between inflation and unemployment

If workers ignore inflation in forming their expectations of the real wage​ rate, what is the effect of an expansionary monetary​ policy?

A move up along the​ short-run Phillips curve.

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations

A movement from point A to point C.

Which of the following statements concerning the Phillips curve is​ correct?

Many economists and policymakers in the 1960s viewed the Phillips curve as a structural relationship.

Given that the Phillips curve is derived from the aggregate demand and aggregate supply​ model, why use the Phillips​ curve?

The answer is that while the aggregate demand and aggregate supply model shows the price level​, the Phillips curve explicitly shows the inflation rate. ​Further, the aggregate demand and aggregate supply model explicitly shows changes in the level of real GDP​, while the Phillips curve explicitly shows the unemployment rate .

Which of the following can most likely be inferred from the information given​ above?

The economy is currently on the​ long-run Phillips curve.

When Burns refers to​ "the current​ environment," he means the​ 1970s, a period in which

both inflation and unemployment worsened.

In this​ case,

firms will hire fewer workers than they had planned to hire and employment will fall.

If this evaluation of the economic situation is​ correct, the Fed should consider

increasing its federal funds rate target.

According to the real business cycle​ models,

inflation can change due to movements in the money​ supply, however, fluctuations in real GDP are mainly explained by changes in the level of technology.

Prior to the U.S. dollar​ strengthening, Fed policy had been attempting to reach a point on the​ short-run Phillips curve representing

lower unemployment and higher inflation because the inflation rate had been below the​ Fed's target of 2 percent for more than three years.

The effect is

more likely if inflation is unanticipated because workers would not seek higher nominal wages.

The unemployment rate

rose from​ 6% to​ 10% during the period of the Volcker disinflation.

As the public starts expecting a higher inflation​ rate, the​ short-run Phillips curve will

shift up and to the right

Consider the​ long-run Phillips curve and the​ short-run Phillips curve in the graph at right. A movement from point A to point B could be caused by

short run effects of contractionary monetary policy.

In macroeconomics courses in the 1960s and early​ 1970s, some economists argued that one of the U.S. political parties was willing to have higher unemployment in order to achieve lower inflation and that the other major political party was willing to have higher inflation in order to achieve lower unemployment. Such views of the​ trade-off between inflation and unemployment might have existed in the 1960s because the Phillips curve was widely viewed as

stable.

Do all economists agree with​ Lucas's main conclusions about the effectiveness of monetary​ policy? Briefly explain. Many economists have remained skeptical of all the​ following, except

that there is a​ short-run trade-off between unemployment and inflation.

When Federal Reserve Chairman Ben Bernanke said that the​ public's expectations of inflation could​ "become embedded in wage and price​ decisions," he meant

that​ workers, firms,​ consumers, and the government will all take the inflation rate into account when making decisions.

​If, in the long​ run, real GDP returns to its potential​ level, then in the long​ run,

the Phillips curve is vertical.

Robert Lucas and Thomas Sargent argued that

there might not be a​ trade-off between unemployment and inflation in the short​ run, and the​ short-run Phillips curve would be vertical.

Most economists in 1968 would not have agreed with him because

they believed in the stable trade-off relation manifested in the Phillips curve.

In referring to the​ "increasing strength of the U.S.​ dollar," the company meant that

the​ dollar/foreign currency exchange rate had risen.

Friedman defined the​ "natural rate of​ unemployment" as the

unemployment rate that exists when the economy produces potential GDP.

If the Fed fails to​ act, it is likely that the​ short-run Phillips curve will shift

up over time as inflation​ occurs, and workers and firms adjust to the higher inflation rate.

If workers and firms have rational​ expectations, they will

use all available information when forming their expectations of future​ inflation; thus, the actual inflation rate will be equal to the expected inflation rate.

If the Fed wants to move from a point on the​ short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher​ inflation, then it should

use expansionary monetary policy.

If the unemployment rate is below the natural​ rate, the inflation rate tends to​ ___________, and​ eventually, the​ short-run Phillips curve will shift​ _______.

​increase; up

Point E on the Phillips curve graph represents the same economic situation as point B on the aggregate demand and aggregate supply graph.

Point D on the Phillips curve graph represents the same economic situation as point C on the aggregate demand and aggregate supply graph.

Roasia is a developing economy with a large population. Its public healthcare and transportation infrastructure is very​ poor, which creates a bottleneck for industrial development. Leading industry experts have been claiming that investment in infrastructure so far has not been sufficient. According to​ them, there is a pressing need to step up government expenditure on public infrastructure. With the debate heating​ up, the government proposed a 30 percent increase in infrastructure investment this year. This is also expected to reduce unemployment considerably from the current level of 6 percent. Which of the following conclusions can most reasonably be drawn from the information given​ above

With increased government​ expenditure, the economy will move up along the​ short-run Phillips curve.

Indicate the two main objections to the idea that the​ short-run Phillips curve is vertical.

Workers and firms might not have rational expectations. Contracts with workers keep wages sticky.

If the board had kept its estimate fixed at 5.5 percent during a period when the actual NAIRU was higher​, monetary policy would have been too

expansionary in an effort to decrease the unemployment rate.

Such views are rare today because

in the long run there is no tradeoff between inflation and unemployment.

In referring to an​ "unfavorable foreign currency​ translation," the company meant that

it was more expensive for businesses around the world to purchase U.S. goods because of changes in the exchange rate.

A movement from point A to point C could be caused by

long run effects of contractionary monetary policy.

In​ 2010, Congress passed the Wall Street Reform and Consumer Protection Act​ (Dodd-Frank Act) which

made it much more difficult for the Fed to use a​ too-big-to-fail policy.

Economists during the early 1960s thought of the Phillips curve as a​ "policy menu" because they thought that the Phillips curve

represented a structural relationship in the economy that would not change as a result of policy changes.

According to Milton​ Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to

rise above or fall below the natural rate.

The​ short-run trade-off between the rate of inflation and the unemployment rate is best represented​ by:

the Phillips curve.

If workers and firms have rational expectations and wages and prices adjust​ quickly, then if the Fed announces a credible expansionary monetary​ policy,

the inflation rate will​ increase, but the unemployment rate will be unchanged.

If actual inflation is higher than expected​ inflation, the

actual real wage is less than the expected real​ wage: unemployment falls.

The concept of a nonaccelerating inflation rate of unemployment​ (NAIRU) helps us to understand why in the long​ run, the Federal Reserve

can affect the inflation rate but not the unemployment rate.

If the​ long-run aggregate supply curve is​ vertical, then the Phillips curve

cannot be downward sloping in the long run.

When Robert Shiller asked a sample of the general public what they thought caused​ inflation, the most frequent answer he received was​ "greed." Most economists would argue that inflation is caused by

changes in both aggregate demand and aggregate supply.

Robert Shiller asked a sample of the general public and a sample of economists the following​ question: ​"Do you agree that preventing high inflation is an important national​ priority, as important as preventing drug abuse or preventing the deterioration in the quality of our​ schools?" ​Fifty-two percent of the general​ public, but only 18 percent of​ economists, fully agreed. The general public believes that inflation is a bigger problem than economists do because the general public believes that real wages

fall until a full inflation correction takes place .

​Workers, firms,​ banks, and investors in financial markets care about the future rate of inflation because

if actual inflation turns out to be different from the expected​ inflation, real​ wages, profits, and interest will be different from their expected values.

The board would change its estimate of the NAIRU over time when

the natural rate of unemployment changes as a result of demographic changes or changes in labor market institutions.

Assuming people have rational​ expectations,

when the Fed uses monetary​ policy, people quickly realize the impact that will be created by the​ policy, adjust wages and​ prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP.

If expected inflation is higher than actual​ inflation, actual real wages in the economy will turn out to be​ _________ than expected real​ wages; consequently, firms will hire​ _________ workers than they had planned.

​higher; fewer

If inflation increases beyond expectations of​ inflation,

the real wage paid by employers and received by workers will decrease.

The Phillips curve exhibits

the relationship between the unemployment and the inflation rates.

What is the Fed doing to increase the credibility of its​ policies?

A.Whenever a change in policy is​ announced, the change actually takes place. B.Announcing the federal funds target rate. (Both A and B)

According to many economists and​ policymakers, what other options does the Fed have to improve its credibility with​ workers, firms, and​ investors?

All of the above A.Following a discretion strategy. B.Following a rules strategy. C.Following the Taylor rule.

Which of the following statements is ​correct?

All of the above. A.In the long​ run, the Phillips curve is a vertical line at the natural rate of unemployment. B.In the long​ run, a higher or lower inflation rate has no effect on the unemployment rate. C.In the long​ run, a higher or lower price level has no effect on real GDP.

In the figure to the​ right, expected inflation is initially at​ 1.5%. When expected inflation increases to​ 4.5%, which of the following will​ occur?

All of the above. A.To have​ 3.5% unemployment​ rate, inflation would be​ 7.5%. B.At the natural rate of​ unemployment, inflation is​ 4.5%. C.Unemployment reaches the natural rate of​ 5%.

This approach works by

offering information about the policy outlook and expectations for the future path of the federal funds rate.

What economic framework did economists change as the result of​ Lucas's arguments?

Economists changed the theory of​ "adaptive expectations" where people assume that future rates of inflation will follow the past rates of inflation.

As of​ 1993, the Fed sets targets for which of the following in order to achieve price stability and high​ employment?

Federal funds rate

The Taylor rule​ is:

Federal funds target rate​ = Current inflation rate ​+ Equilibrium real federal funds rate ​+ (0.5​ × Inflation​ gap) +​ (0.50 × Output​ gap).

Why​ doesn't the Phillips curve represent a permanent​ trade-off between unemployment and inflation in the long​ run?

In the long​ run, aggregate supply is vertical.

General Juan​ Peron, the former dictator of​ Argentina, once said of the labor market in his​ country, ​"Prices have gone up the​ elevator, and wages have had to use the​ stairs."

In this​ situation, real wages in Argentina were falling Unemployment was likely to have been relatively low

Why do most economists believe that it is important for a​ country's central bank to be independent of the rest of the​ country's central​ government?

Independent central banks are more effective at fighting inflation.

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The​ curve, shown at the​ right, indicates what type of relationship between the two​ variables?

Inverse relationship

When SRAS1 shifts to SRAS2​, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

The country of Tarragon is a developing economy which has been experiencing a very high level of inflation for the last one year. Shira​ Kapoor, a prominent​ academician, is of the opinion that the central bank should intervene and attempt to bring inflation down from the current level of eight percent to an acceptable level between three to five percent. Jack​ Dorian, who heads the Industries Federation of Tarragon​ (IFT), however believes that this will adversely affect the economy. The decline in the prices of goods and services as a result of this intervention will reduce overall production in the country. Which of the following statements is most supported by the information given​ above?

Jack is confusing disinflation with deflation.

How can the Fed fight a combination of rising unemployment and rising​ inflation?

Not​ easily; neither expansionary nor contractionary monetary policy can solve both problems simultaneously.

In the figure to the​ right, at what point is the inflation rate​ stable? That​ is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment

Point C

When the central bank of Tarragon reduced the money​ supply, inflation was expected to decline to five percent.​ However, inflation actually increased further from eight to 10 percent in the following months. Which of the​ following, if​ true, can explain this​ outcome?

Recent sanctions on two major​ oil-producing nations caused a shortage of oil globally.

As expectations of inflation​ increase, the​ short-run Phillips curve will

Shift to the right

In​ 1968, Herbert​ Stein, who would later serve on President​ Nixon's Council of Economic​ Advisors, wrote, ​"Some who would opt for avoiding inflation would say that in the long run such a policy would cost​ little, if​ any, additional​ unemployment.

Stein's statement was correct

Which of the following statements is true about the Fed under the leadership of Chairman Alan Greenspan between 1987 and​ 2006?

The Fed attempted to enhance its credibility by announcing its monetary policy action at the conclusion of each FOMC meeting.

The average price level in​ Outlandia, a developing​ country, increased by 5 percent this year compared to last year. Graeme​ Border, a member of the Department of​ Commerce, suggested that the central bank should use contractionary policies to curb inflation. According to him reducing inflation would help in improving general welfare. His friend Abraham​ Scott, a business​ analyst, disagrees. Abraham feels​ that, given the state of affairs in the​ economy, a contractionary monetary policy will not be a suitable measure. Economists in Roasia were expecting the increased investment in infrastructure to lower unemployment by 1.5 percent this year.​ However, unemployment only declined by 0.5 percent. Which of the​ following, if​ true, can explain this​ outcome?

The Roasian central​ bank's recent open market sale of bonds was unanticipated.

West​ Paragon, a developed​ economy, has been experiencing stable and low inflation for the last two years. There is consensus that the current unemployment rate of 4 percent is also its natural rate of unemployment.​ However, the​ country's GDP growth is stagnating and the government of West Paragon is worried about a possible slowdown. Given the​ situation, members of the government believe that the central bank should increase money supply in order to stimulate growth. Analysts at a leading economic research institute however believe that increasing money supply will only raise inflation and will not have any positive impact on unemployment. Which of the following can most likely be inferred from the information given​ above?

The economy is currently on the​ long-run Phillips curve.

Paul Volcker is credited largely with which of the​ following?

The​ "Volcker disinflation." And Fighting inflation by reducing the growth of the money supply

Which of the following decisions does the textbook discuss as an action by the Fed during Chairman Alan​ Greenspan's term that possibly contributed to the financial crisis of​ 2007-2009?

The​ Fed's decision to keep the target for the federal funds rate at 1 percent for more than 18 months after the end of the 2001 recession.

Suppose that the expected inflation rate increases from 4 percent to 6 percent. What will happen to the​ short-run Phillips​ curve?

The​ short-run trade-off between uemployment and inflation will be worse than before as the economy moves to a higher​ short-run Phillips curve.

An article in the Economist observes that​ "a sudden unanticipated spurt of inflation could lead to rapid economic​ growth."

This statement implies that there is a positive relationship between inflation and economic growth.

Suppose the inflation rate has been 15 percent for the past four years. The unemployment rate is currently at the natural rate of unemployment of 5 percent. The Federal Reserve decides that it wants to permanently reduce the inflation rate to 5 percent. To do​ this, the Fed would use

a contractionary policy.

According to Lucas and​ Sargent, workers and firms have rational​ expectations, and therefore if the Fed pursues an expansionary monetary​ policy:

agents will immediately adjust their expectations of inflation

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low.

As a result of this​ policy, the unemployment rate will be greater than the natural rate of 5 percent

and the inflation rate will be edging down slowly.

If the​ Fed's policy is​ successful, the inflation rate will be 5 percent

and the unemployment rate will be 5 percent.

If the Federal Reserve keeps monetary policy​ unchanged, eventually the unemployment rate will​ be:

back to the​ 5% natural rate of unemployment.

As a central bank has greater independence from the​ government, the​ economy's inflation rate tends to

be reduced

During the 1980s and​ 1990s, the relationship between growth in M2 and inflation

broke​ down, and the Fed announced that it would no longer set targets for M2.

If the Fed had raised interest rates earlier than it​ did, Schwab would have expected

consumer spending to have increased.

A country would want to grant its central bank more independence than it​ grants, say, its department of agriculture or department of​ education, because the central bank

controls the money​ supply, and the more independent the central​ bank, the lower is the likelihood of inflation.

Which of the following terms best describes the situation during​ 1933?

deflation

In a speech in September​ 1975, then Fed chairman Arthur Burns said the​ following: ​"There is no longer a meaningful​ trade-off between unemployment and inflation. In the current​ environment, a rapidly rising level of consumer prices will not lead to the creation of new jobs...Highly expansionary monetary and fiscal policies​ might, for a short​ time, provide some additional thrust to economic activity. But inflation would inevitably​ accelerate- a development that would create even more difficult economic problems than we have encountered over the past​ year." Burns's views in this speech are

different than the views at the Fed in the late 1960s.

A significant reduction in the inflation rate is called

disinflation.

The Phillips curve is a

downward sloping straight line

The​ Fed's "target policy​ rate" refers to the

federal funds rate.

An attempt to shape expectations about future policy decisions is what the Fed refers to a

forward guidance.

Disinflation might have been a good thing in the​ 1980s, but worrisome in​ 2015, because

inflation was persistently high and the Fed was not credible in the​ 1980s, but inflation was persistently low and the Fed was more credible in 2015.

The Fed appears to believe that the more​ "potent multiplier​ effect" is associated with

investment spending because it is more sensitive to lower interest rates.

A central​ bank's ability to maintain credibility on a policy to keep inflation low

is important because maintaining credibility allows a central bank to keep inflation expectations lower.

Many Fed officials have been opposed to adopting a​ rules-based policy because

it would reduce the ability of the Fed to respond rapidly to a financial crisis.

In order to improve credibility the Fed has enacted all of the following​ policies, except:

the Fed no longer makes​ it's future intentions clear.

The event that may have led him to conclude that it is more painful to reduce the inflation rate than theory would predict was

the Volcker disinflation.

In the United​ States, the Fed is held accountable to the​ nation's elected leadership through

the nomination and confirmation​ process, and the requirement to submit semiannual reports on monetary policy and the economy to Congress.

As expectations of inflation​ increase, firms and workers increase wages and​ prices,

therefore inflation increases

He concluded that the U.S. economy apparently had​ "price stickiness," because

wages and prices declined very slowly during the disinflation process.

A serious inconsistency exists between a vertical​ long-run aggregate supply curve and a​ downward-sloping long-run Phillips curve because

when the​ long-run aggregate supply curve is vertical at potential real​ GDP, the​ long-run Phillips curve is vertical at the natural rate of unemployment.

Members of the Federal Open Market Committee might have believed that the natural rate of unemployment was lower in 2015 than it had been several years earlier because

while unemployment had persisted for more than four years after the end of the​ 2007-2009 recession, it then began to decline.

Economists have remained skeptical of the argument that the​ short-run Phillips curve is vertical for all of the following reasons​ except:

workers and firms may adjust prices and wages quickly.

Consider the graph on the​ right, where both the​ short-run and​ long-run Phillips curves are vertical. An expansionary monetary policy will increase the inflation rate continuously but will have no effect on the unemployment rate because of all the following except

workers and firms who have adaptive expectations will not consider the​ Fed's policy before forming their expectations about inflation.

There is a different​ short-run Phillips curve for every level of the​ ___________ inflation rate. The inflation rate at which the​ short-run Phillips curve intersects the​ long-run Phillips curve equals the​ ___________ inflation rate.

​expected; expected

A negative supply​ shock, such as the OPEC oil price increases of the early​ 1970s, can be illustrated by a shift to the​ ______________ of the​ short-run aggregate supply curve and a shift​ _________________ of the​ short-run Phillips curve.

​left; up

After Fed Chairman Paul Volcker began fighting inflation in​ 1979, workers and firms eventually​ ____________ their expectations of future​ inflation, and the​ short-run Phillips curve shifted​ ___________.

​lowered; down

If inflation turns out to be lower than households and firms had previously​ expected, the actual real wage will end up being

higher than the expected real wage.

They were to think of the Phillips curve as a​ "policy menu."

not correct

A lower estimate of the natural rate of unemployment would lead the Fed to lower its target policy rate because the

output gap would increase.

In claiming that an expansionary monetary policy will only increase inflation and have no impact on​ unemployment, the analysts are assuming​ that:

people accurately interpret all available information to form reliable forecasts.

Suppose that the inflation rate is increasing each year for a number of​ years, then

the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational​ expectations, then they will use all the available information to forecast future inflation.

Slow growth in aggregate demand leads to

higher unemployment and lower inflation.

An increase in inflation expectations will cause the inflation rate to

increase at all levels of unemployment.

The natural rate of unemployment is the unemployment rate at which the inflation rate has no tendency to increase or decrease.​ However, the natural rate of unemployment is not fixed. What causes changes in the natural rate of​ unemployment? Which of the following will not cause the natural rate of unemployment to​ change?

Changes in the money supply resulting from monetary policy.

Workers generally form their expectations of future inflation based on the current conditions in the economy. Which one of the following does not reflect how they form their​ expectations?

During periods of high​ inflation, people do not take any particular action until the Fed has controlled the inflation rate.

Roasia is a developing economy with a large population. Its public healthcare and transportation infrastructure is very​ poor, which creates a bottleneck for industrial development. Leading industry experts have been claiming that investment in infrastructure so far has not been sufficient. According to​ them, there is a pressing need to step up government expenditure on public infrastructure. With the debate heating​ up, the government proposed a 30 percent increase in infrastructure investment this year. This is also expected to reduce unemployment considerably from the current level of 6 percent. With a 30 percent increase in​ investment, industry experts predicted that unemployment would decline from 6 to 4 percent in two​ years' time.​ However, the unemployment level at the end of two years was even lower at 3 percent. Which of the​ following, if​ true, can explain this​ outcome?

Following the investment in​ infrastructure, Roasia saw an unprecedented increase in foreign direct investment.

West​ Paragon, a developed​ economy, has been experiencing stable and low inflation for the last two years. There is consensus that the current unemployment rate of 4 percent is also its natural rate of unemployment.​ However, the​ country's GDP growth is stagnating and the government of West Paragon is worried about a possible slowdown. Given the​ situation, members of the government believe that the central bank should increase money supply in order to stimulate growth. Analysts at a leading economic research institute however believe that increasing money supply will only raise inflation and will not have any positive impact on unemployment. Which of the​ following, if​ true, will weaken the claim of the analysts at the research​ institute?

People of West Paragon tend to underestimate monetary policy impacts.

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent​ trade-off between unemployment and inflation.

In a real business cycle​ model, which of the following best explains an increase in real GDP above the​ full-employment level?

a positive technology shock

The​ "Volcker disinflation" was

a significant reduction in the inflation rate between 1979 and​ 1989, under the leadership of Fed Chairman Paul Volcker.

If Ford and the United Auto Workers​ (UAW) union fail to accurately forecast the inflation​ rate, the real wage will be different than the company and the union had expected. The company and the union sign​ long-term contracts rather than negotiate a new contract each year because each party believes that the

actual inflation rate will be equal to their expected inflation rate in the long term.

According to Lucas and​ Sargent, workers and firms have rational​ expectations, and therefore if the Fed pursues a contractionary monetary​ policy:

agents will immediately adjust their expectations of inflation down.

If Lucas and Sargent were​ right,

an expansionary monetary policy would not work if people had rational​ expectations, since they will use all available information including knowledge of the effects of the​ Fed's monetary policy.

When Gregory says that the​ "policy ... is unlikely to have a stimulative effect because it will be easily​ anticipated," he indicates his belief that households and businesses have

rational expectations of inflation in which all available information is used in forming expectations.