EC102 Last Third Info

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Which of the following statements is ​correct?

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. D. All of the above.

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

D

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.

a. Point ▼ D E neither D nor E on the Phillips curve LOADING... graph represents the same economic situation as point B on the aggregate demand and aggregate supply graph.

E

An article in the Economist magazine contains the​ following: ​"Robert Lucas . . . showed how incorporating expectations into macroeconomic models muddled the framework economists prior to the​ 'rational expectations​ revolution' thought they saw so​ clearly." ​Source: "How to Know What Causes​ What," Economist​, October​ 10,2011. 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

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." ​Source: Robert J.​ Shiller, "Why Do People Dislike​ Inflation?" in Christina D. Romer and David H.​ Romer, eds., Reducing​ Inflation: Motivation and Strategy​, ​ Chicago: University of Chicago​ Press, 1997. In this​ situation, real wages in Argentina were

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.

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.It

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.

Most economists in 1968 ▼ would would not have agreed with him because they ▼ believed in the stable trade-off relation manifested in the Phillips curve. knew about the long-run Phillips curve. distinguished between the short-run and the long-run Phillips curves.

Most economists in 1968 would not have agreed with him because they believed in the stable trade-off relation manifested in the Phillips curve.

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 LOADING...​?

Point C

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.

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.

The​ short-run Phillips curve exhibits ▼ ​, whereas the​ long-run Phillips curve shows ▼ .

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 .

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 unemployment and inflation will be worse than before as the economy moves to a higher​ 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.

​[Related to Solved Problem ​#4​] 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 an expansionary policy.

a contractionary

In an opinion column in the Wall Street Journal​, Stanford University economist John​ Taylor, originator of the Taylor​ rule, argued,​ "As I see​ it, the broader evidence in the United States and in many other countries ... is that a​ rules-based policy has worked and that discretionlong dashconstrained or otherwiselong dashhas ​not." ​Source: John B.​ Taylor, "Taylor on​ Bernanke: Monetary Rules Work Better Than​ 'Constrained Discretion'," Wall Street Journal​, May​ 2, 2015. When Taylor refers to a​ "rules-based policy," he means

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

Economists who believed that the Phillips curve represented a structural relationship LOADING... 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 shocka

The​ "Volcker disinflation" was

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

Above are four​ graphs, and below are four economic​ scenarios, each of which would cause either a movement along the​ short-run or​ long-run Phillips curve or a shift in the​ short-run or​ long-run Phillips curve. Match each scenario with the appropriate graph.

a. The proportion of younger and less skilled workers in the labor force decreases. 3 b. The Fed carries out an expansionary monetary policy 4 c. Congress enacts significant new legal barriers to firing workers 1 d. Workers and firms lower the inflation rate they expect 2

If General Motors 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.

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.

If Lucas and Sargent were​ right,

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

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

back to the ​ 5% natural rate of unemployment.

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

both inflation and unemployment worsened.

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

brokebr ​ 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.

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.ch

While many economists and policymakers supported the​ Fed's decision to maintain the federal funds rate at a​ near-zero level for over six​ years, Charles​ Schwab, the founder and chairman of a discount brokerage firm that bears his​ name, argued that the economy was harmed by keeping interest rates low for an extended period of​ time: U.S. households lost billions in interest income during the​ Fed's near-zero interest rate experiment. ... Because they are often reliant on income from​ savings, seniors were hit the hardest. ... Seniors make up​ 13% of the U.S. population and spend about​ $1.2 trillion annually. ... This makes for a potent multiplier effect. ​Source: Charles R.​ Schwab, "Raise Interest​ Rates, Make Grandma​ Smile," Wall Street Journal​, November​ 19, 2014. If the Fed had raised interest rates earlier than it​ did, Schwab would have expected

consumer spending to have increased.

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

contractionary in an effort to increase the unemployment rate.

An opinion column in the Wall Street Journal​ notes, "In a​ democracy, the tradeoff for a central​ bank's independence is accountability to the​ nation's elected​ leadership." ​Source: David​ Wessel, "Explaining​ 'Audit the​ Fed'," Wall Street Journal​, February​ 17, 2015. 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.

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." ​Source: Herbert​ Stein, The Fiscal Revolution in America​, ​Chicago: University of Chicago​ Press, 1969, p. 382. ​Stein's statement was ▼ correct incorrect .

correct

Higher interest rates would have

decreased investment spending by firms and home purchases.de

Look again at the chart on prices during the early​ 1930s: Year Consumer Price Index ​%-Change in Prices 1929 17.1 minus 1930 16.7 minus​2.3% 1931 15.2 minus9.0 1932 13.7 minus9.9 1933 13.0 minus5.1 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." ​Source: Arthur F.​ Burns, "The Real Issues of Inflation and​ Unemployment," in Federal Reserve Bank of New​ York, Federal Reserve Readings on Inflation​, February 1979. ​Burns's views in this speech are ▼ similar to different than the views at the Fed in the late 1960s.

different than

A significant reduction in the inflation rate is called

disinflation.

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

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 .

fall until a full inflation correction takes place .

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

federal funds rate.

In this​ case,

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

​[Related to the Making the Connection​] In an opinion column in the New York Times​, economist Justin Wolfers of the University of Michigan​ noted, "Over recent​ years, policy makers have also worked to lower​ long-term interest rates by shaping expectations about future monetary policy​ decisions." ​Source: Justin​ Wolfers, "The Fed Has Not Stopped Trying to Stimulate the​ Economy," New York Times​, October​ 29, 2015. An attempt to shape expectations about future policy decisions is what the Fed refers to as

forward guidance.

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.

greater than down

An article in the Wall Street Journal has the headline​ "Don't Look​ Now, but Market Inflation Expectations Are​ Falling." ​Source: Jon​ Hilsenrath, "Don't Look​ Now, but Market Inflation Expectations Are​ Falling," Wall Street Journal​, August​ 10, 2015. 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.

Slow growth in aggregate demand leads to

higher unemployment and lower inflation.

​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.

Such views are rare today because

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

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

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

increased

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

increasing its federal funds rate target.

An article in the New York Times in 2015 quoted Minneapolis Fed President Narayana Kocherlakota as stating that​ "disinflation is​ worrisome." However, most economists applaud the​ "Volcker disinflation" of the 1980s. ​Source:​ Reuters, "Fed's Kocherlakota Sees Risk of U.S.​ Disinflation," New York Times​, April​ 14, 2015. 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 thein ​ 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.in

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.it

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.

​Further, the aggregate demand and aggregate supply model explicitly shows changes in the ▼ level of real GDP unemployment rate ​, while the Phillips curve explicitly shows the ▼ level of real GDP unemployment rate .

level of real GDP unemployment rate

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

long run effects of contractionary monetary policy.lo

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.

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.

The effect is

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

In early​ 2015, an article in the Economist noted that it was possible that in the United​ States, "the NAIRU may already have been reached and inflation will start​ accelerating; the Fed should act​ soon." ​Source:​ "Jobs Matter, Not the​ Dollar," Economist​, March​ 25, 2015. NAIRU is the

nonaccelerating inflation rate of unemployment.no

This approach works by

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

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.

An article in the Economist observes that​ "a sudden unanticipated spurt of inflation could lead to rapid economic​ growth." ​Source:​ "How We Got​ Here," Economist​, January​ 21, 2013. This statement implies that there is a ▼ negative positive relationship between inflation and economic growth.

positive

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 inflation rate ​, the Phillips curve explicitly shows the ▼ price level inflation rate .

price level inflation rate

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.

In an article in Forbes​, Paul Roderick​ Gregory, an economist at the University of​ Houston, commented on the use of monetary policy to fight a​ recession: "Those who devise stimulus programs must know in advance the extent to which households and businesses will correctly anticipate the policy. A policy that has been used x times in the past is unlikely to have a stimulative effect because it will be easily​ anticipated." ​Source: Paul Roderick​ Gregory, "Thomas​ Sargent, Rational Expectations And The Keynesian​ Consensus," Forbes​, October​ 11, 2011. 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.

Robert Lucas​ said: ​"In practice, it is much more painful to put a modern economy through a deflation than the monetary theory we have would lead us to expect. I take this to mean that we have​ 'price stickiness."' ​Source: Paul A. Samuelson and William A.​ Barnett, eds., Inside the​ Economist's Mind: Conversations with Eminent Economists​, ​Malden, MA: Blackwell​ Publishing, 2007, p. 63. When Lucas made the comment about​ "the monetary theory we​ have," he meant the

rational expectations theory.ra

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.re

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.re

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 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 ▼ not shift at all shift up and to the right shift down and to the left .

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 ath ​ short-run trade-off between unemployment and inflation.

In Congressional​ testimony, Federal Reserve Chairman Ben Bernanke​ said: ​"Another significant factor influencing​ medium-term trends in inflation is the​ public's expectations of inflation. These expectations have an important bearing on whether transitory influences on​ prices, such as changes in energy​ costs, become embedded in wage and price decisions and so leave a lasting imprint on the rate of​ inflation." ​Source: "Testimony of Chairman Ben S. Bernanke before the Joint Economic​ Committee,U.S.Congress," March​ 28, 2007. 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.

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.

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.

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.

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

the lower its inflation rate.th

Over​ time, the Federal Reserve Board of Governors has changed its estimate of the nonaccelerating inflation rate of unemployment​ (NAIRU). The following are the​ board's NAIRU estimates for selected years. Year NAIRU​ (percent) 1970 6.0 1980 6.4 1990 5.6 2000 5.1 2008 4.8 2011 6.0 2017 4.7 ​Source: Board of Governors of the Federal Reserve System. 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.th

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

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

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 rationalth ​ expectations, then they will use all the available information to forecast future inflation.

The Phillips curve exhibits

the relationship between the unemployment and the inflation rates.th

We can tell whether a monetary policy has worked by

the state of the economy.

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.

​[Related to the Chapter Opener​] In its 2014 Annual Report​, Goodyear​ noted, "The increasing strength of the U.S. dollar created unfavorable foreign currency translation for many of our businesses around the​ world." ​Source: Goodyear Tire​ & Rubber​ Company, 2014 Annual Report​, p. 3. 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 up ​ 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.

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

wages and prices declined very slowly during the disinflation process. wa

​Therefore, during the​ 1970s, there ▼ was was not a​ trade-off between unemployment and inflation.

was not

They were not correct to think of the Phillips curve as a​ "policy menu."

were not correct

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.

​[Related to the Making the​ Connection] In​ 2015, an article in a publication of the Federal Reserve Bank of San Francisco​ noted, "FOMC participants have steadily lowered their estimates of the natural rate of unemployment ... over the past several​ years." The article also noted that​ "a lower natural rate of unemployment also implies a lower target policy​ rate." ​Source: Mary C.​ Daly, Fernanda​ Nechio, and Benjamin​ Pyle, "Finding​ Normal: Natural Rates and Policy​ Prescriptions," FRBSF Economic Letter​, July​ 6, 2015. 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 thewh ​ 2007-2009 recession, it then began to decline.

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

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

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

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

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 LOADING...​?

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. D. A and B only.

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?

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

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

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

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 discretion strategy. C. Following a rules strategy. D. All of the above


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