ch 17

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

A movement from point A to point C

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

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

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

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

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

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

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

B. Workers and firms might not have rational expectations. Your answer is correct. C. Contracts with workers keep wages sticky.

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

Federal funds rate

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

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 SRAS 1 shifts to SRAS 2 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.

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 ?

The moral of the vertical​ long-run inflation rate is that in the long​ run, there is no​ trade-off between the unemployment rate and the inflation rate. The inflation rate is stable only if the unemployment rate equals the natural rate of unemployment​ (point C). It is often called the nonaccelerating inflation rate of unemployment​: the unemployment rate at which the inflation rate has no tendency to increase or decrease. If the unemployment rate is below the natural rate​ (point A), the inflation rate​ increases, and,​ eventually, the Phillips curve shifts up. If the unemployment rate is above the natural rate​ (point B), the inflation rate​ decreases, and,​ eventually, the Phillips curve shifts down.

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?

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

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

a permanent​ trade-off between unemployment and inflation

If actual inflation is higher than expected​ inflation, the

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

Alan Greenspan

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

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

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

the Phillips curve is vertical