chapter 17

Fill in the blanks. 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

A trade-off between inflation and unemployment exists

only in the short run

If workers ignore inflation in calculating the real wage rate, what is the effect of an expansionary monetary policy?

a move upward along the short-run Phillips curve

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

Fill in the blanks. 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

What determines how long the economy remains at a point that is on the short-run Phillips curve but not on the long-run Phillips curve?

how quickly the public's expectations of future inflation adjust to changes in current inflation

If workers and firms have rational expectations and wages and prices adjust quickly, an expansionary monetary policy will

increase the inflation rate, but not change the unemployment rate.

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

the lower its inflation rate.

The monetary explanations of Lucas and Sargent and the real business cycle models are sometimes grouped together under the label of

the new classical macroeconomics

Like the classical economists, the new classical macroeconomists believe that

the short-run Phillips curve is horizontal.

If workers and firms revise their expectations of inflation upward,

the short-run Phillips curve will shift up.

What is the nonaccelerating inflation rate of unemployment (NAIRU)?

the unemployment rate at which the inflation rate has no tendency to change

The natural rate of unemployment is

the unemployment rate that results when the economy produces the potential level of real GDP

If the wage rate is $10.00 and the price level is 125, then the real wage rate is

$12.50.

If banks need to receive a 2.0 percent real interest rate on home mortgage loans, what nominal interest rate must they charge if they expect the inflation rate to be 1.5 percent?

3.5 percent

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

Many economists and policymakers in the 1960s and 1970s viewed the Phillips curve as a structural relationship.

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

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

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

How did the Federal Reserve respond to the effects of the oil supply shock in the mid-1970s that led to rising unemployment and rising inflation?

The Fed used an expansionary monetary policy to fight the high unemployment rate.

Which of the following is identified in the textbook as an action by the Fed during 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

Which change in the inflation rate is more likely to affect the levels of both inflation and unemployment?

a change in the inflation rate that is unexpected

Which of the following statements is correct?

a. In the long run, a higher or lower price level has no effect on real GDP. b. In the long run, a higher or lower inflation rate has no effect on the unemployment rate. c. In the long run, the Phillips curve is a vertical line at the natural rate of unemployment

If people assume that future rates of inflation will be about the same as past rates of inflation, they are said to have

adaptive expectations.

Paul Volcker's monetary policy caused the Phillips curve to shift down, but only after several years of high unemployment. This suggests that workers and firms had

adaptive expectations; that is, they changed their expectations of future inflation after the current inflation rate had fallen.

If the annual inflation rate is 2 percent, which of the following will increase real wages?

an increase in nominal wages of more than 2 percent

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.

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

A significant reduction in the inflation rate is called

disinflation.

Fill in the blanks. 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

Fill in the blanks. When aggregate demand increases, unemployment will usually _________ and inflation will _________.

fall; rise

In order to drive down the inflation rate, the unemployment rate will have to rise more if the short-run Phillips curve is

flatter

Fill in the blanks. Disinflation refers to a decline in the ______________, while deflation refers to a decline in the ______________.

inflation rate; price level

The long-run Phillips curve

is vertical at the natural rate of unemployment

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

leftward; upward

A point near the top left segment of the short-run Phillips curve represents a combination of

low unemployment and high inflation.

After Fed Chairman Paul Volcker decided to fight inflation in 1979, the Fed's monetary policy resulted in

lower expectations of future inflation by firms and workers.

Beginning in 2008, the Fed implemented quantitative easing policy in order to

lower long-term interest rates on corporate bonds and mortgages.

Slow growth in aggregate demand leads to

lower unemployment and higher inflation

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

lowered; down

Expectations formed by using all available information about an economic variable are called

rational expectations.

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.

A negative supply shock will shift the

short-run Phillips curve up.

An increase in expected inflation will shift the

short-run Phillips curve up.

A Phillips curve is a curve showing the

short-run relationship between the unemployment rate and the inflation rate.