Aiken chap 16 hw

Disinflation is costly to the economy if _____ is forced on the economy, _____, and _____.

a recession; unemployment increases; aggregate output falls

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

In the classical model, it is thought that the long-run:

and short-run aggregate supply curves are both vertical.

A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.

decrease; increase

The U.S. government reports a core inflation rate that EXCLUDES _____ and _____ prices to remove the volatility of those two sectors from inflation estimates.

energy; food

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.

Deflation:

hurts borrowers and helps lenders.

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

ineffective; effective

A long-run Phillips curve has a(n) _____ slope because _____.

infinite; any unemployment rate below the NAIRU leads to ever-accelerating inflation

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

inflation will increase.

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

Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _____, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _____

left; up

Who gains when there is unexpected deflation?

lenders

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

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:

prices in country A increase faster than prices in country B.

If workers expect a lower rate of inflation, the short-run Phillips curve will:

shift down.

During an inflationary gap:

the unemployment rate is less than the natural rate of unemployment

When workers and firms become aware of a rise in the general price level:

they will incorporate higher prices into their expectations.

A negative output gap is associated with a(n) _____ unemployment rate.

unusually high

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.

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

(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at the figure 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 real GDP will increase by:

4%.

(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 1982, the cyclical unemployment rate was approximately:

4%.

If there has been a downward movement along the fixed short-run Phillips curve, the _____ curve has shifted to the _____

AD; left

If there has been an upward movement along the fixed short-run Phillips curve, the _____ curve has shifted to the _____.

AD; right

(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

(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?

YE and P3

(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:

10%.

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: Short-Run Phillips Curve) Look at the figure Short-Run Phillips Curve. SRPC2 is based on an expected inflation rate of:

2%.

(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 decreases the money supply so that aggregate demand shifts from AD2 to AD1, then the unemployment rate will be:

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:

6.5%.

Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:

equal to the natural rate of unemployment.

(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: Question 13 options:

fall to -2%.

If the natural rate of unemployment _____, the nonaccelerating inflation rate of unemployment _____, and the long-run Phillips curve shifts to the left.

falls; falls

A government with a large deficit will also produce high inflation in the economy if it:

finances the deficit via seignorage.

The liquidity trap is associated with all of the following EXCEPT:

fiscal policy becoming ineffective.

In the long run, an increase in aggregate demand from a position of full employment leads to

higher prices and the same output.

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.

(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:

nominal wages rise in the long run.

Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio.

negatively; less than one-to-one

A supply shock:

shifts the short-run Phillips curve.

Which of the following accurately describes disinflation?

It is reduction of the inflation that has become embedded in expectations.

If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the _____.

SRAS; left

If the short-run Phillips curve has shifted downward, the _____ curve has shifted to the _____.

SRAS; right

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

above the natural 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

(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift could be due to:

an increase in money supply.

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

The problem of debt deflation deepens during an economic slump because:

borrowers have to reduce spending to pay off debts.

(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.

(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.

Politicians may accept moderate inflation in an election year, since the _____ in aggregate _____ serves to _____.

increase; demand; increase employment

As people try to avoid the inflation tax, the government must _____ the inflation rate to _____

increase; raise the same revenue from inflation

Deflation leads to winners and losers; for example:

mortgage holders lose, but banks awaiting mortgage payments benefit.

Suppose that the unemployment rate rises as the inflation rate declines. This situation is consistent with a movement along the _____ Phillips curve.

negatively sloped

(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.

(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

not change.

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

not change.

To avoid accelerating inflation over time, a government's policy should _____ to trade off lower unemployment for higher inflation rather than _____.

not try; accept a high enough unemployment rate so that the actual inflation rate matches the expected inflation rat

Disinflation:

policy is likely to plunge the economy into a major recession.

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

positive.

The Fed monetizes the debt when it:

prints money and buys government debt from the public.

Suppose the Fed pursues a policy that leads to higher interest rates in the United States. How will this policy affect real GDP in the short run if the United States is an open economy? This policy

reduces investment spending, consumption spending and net exports, all of which reduce GDP.

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

(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 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% 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%.

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.

The Wall Street Reform and Consumer Protection Act, or Dodd-Frank:

subjects "systemically important" institutions to high capital requirements and limits the risks they can take.

The debt is monetized when:

the Fed buys back debt via open-market purchases.

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

If an economy finds itself in a liquidity trap:

the economy is trapped by the inability of monetary policy to reduce nominal interest rates further.

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

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.

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.

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.

Borrowers benefit:

when government engages in seignorage.