Question 1

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law,  is ________ percent.
A) 2
B) -4
C) 4
D) -2
E) Not enough information is given.

Accepted Answer

Okun's law states that for every 1 percent decrease in the unemployment rate below the natural rate, there will be a 2 percent increase in real GDP. Therefore, a 2 percent increase in real GDP corresponds to a 1 percent decrease in unemployment rate below the natural rate. Since the unemployment rate is 2 percent below the natural rate (5%-3%), the corresponding increase in real GDP is 4 percent (2% x 2).

Question 2

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015  (Source: Bureau of Labor Statistics)
-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2009 to 2010 was a period of:
A) a slumping economy.
B) a booming economy.
C) stagnation.
D) macroeconomic equilibrium.
E) Not enough information is given.

Accepted Answer

The Phillips curve illustrates the inverse relationship between the rate of inflation and the rate of unemployment in an economy. A period of low inflation, such as from 2009 to 2010, typically indicates a slumping economy with higher unemployment rates.

Question 3

In 1979, the inflation rate reached about 14 percent, due in part to ________. The Board of Governors of the Federal Reserve under ________ decided to ________ interest rates, sending the economy into a ________.
A) a fall in oil prices; Volcker; raise; recession
B) an increase in consumer spending; Volcker; lower; recession
C) an increase in oil prices; Volcker; raise; recession
D) an increase in oil prices; Volcker; lower; boom
E) a fall in oil prices; Greenspan; raise; recession

Accepted Answer

In 1979, inflation was significantly impacted by an increase in oil prices. Paul Volcker, who was the Chairman of the Federal Reserve at the time, implemented a policy of raising interest rates to combat inflation, which contributed to the economy entering a recession.

Question 4

In the text, Okun's law is given as:
A)  .
B)  .
C)  .
D)  .
E)  .

Accepted Answer

The answer of In the text, Okun's law is given...

Question 5

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law,  is ________ percent.
A) 4
B) -4
C) 2
D) -2
E) Not enough information is given.

Accepted Answer

The answer of Suppose an economy's natural rate of unemployment...

Question 6

Defining u as the unemployment rate and  as the natural rate of unemployment, Okun's law is given by the following equation:
A)  .
B)  .
C)  .
D)  .
E)  .

Accepted Answer

Okun's law is given by the equation: 
u − u*N = −0.5(g − g*), 
where u is the unemployment rate, u*N is the natural rate of unemployment, g is the growth rate of real GDP, and g* is the trend growth rate of real GDP.

Therefore, the correct answer is B, which is the only option that includes the term "Okun's law" and "natural rate of unemployment".

Question 7

Consider two economies. Economy 1 has a steep Phillips curve and Economy 2 has a gently sloped Phillips curve. If each economy experiences an identical economic expansion, the change in ________ would increase less in Economy ________.
A) inflation; 2
B) unemployment; 1
C) unemployment; 2
D) interest rates; 1
E) Not enough information is given.

Accepted Answer

The Phillips curve illustrates the trade-off between inflation and unemployment, with a steeper curve indicating a more significant change in inflation for a given change in unemployment. Therefore, in an economic expansion, inflation would increase less in Economy 2 with a gently sloped Phillips curve compared to Economy 1.

Question 8

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015  (Source: Bureau of Labor Statistics)
-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2001 to 2002 was a period of:
A) a booming economy.
B) a slumping economy.
C) stagnation.
D) None of these answers is correct.
E) Not enough information is given.

Accepted Answer

According to the Phillips curve, there is an inverse relationship between inflation and unemployment rate. Looking at Figure 9.5, we can see that the inflation rate was low in 2001 and began to decline further in 2002, indicating a period of low economic activity and possibly a slumping or recessionary economy. Therefore, choice B, a slumping economy, is the best answer.

Question 9

Yale professor Ray Fair uses ________ to predict ________.
A) macroeconomic variables; presidential elections
B) a policy rule; the federal funds rate
C) Okun's law; the output gap
D) an econometric model;recessions
E) a theoretical model; fiscal policy

Accepted Answer

Ray Fair uses macroeconomic variables such as GDP growth, inflation, and unemployment rate to predict presidential elections.

Question 10

According to Okun's law, if the Federal Reserve wants to increase unemployment, it should ________ interest rates, which would ________ output.
A) increase; increase
B) increase; reduce
C) reduce; reduce
D) reduce; not change
E) not change; increase

Accepted Answer

Okun's law suggests an inverse relationship between unemployment and GDP, meaning that actions which reduce output (GDP) tend to increase unemployment. Increasing interest rates typically reduces investment and spending, leading to a reduction in output.

Question 11

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the change in inflation is 3 percent, the gap would be ________ percent.
A) 1/4; 0.25
B) 1/3; 3
C) 1/2; 2
D) 2; 0.5
E) 1/3; 1

Accepted Answer

The slope of the Phillips curve is 1/3, meaning that for every 1 percent change in the inflation rate, the gap changes by 1/3 percent. Therefore, if the change in inflation is 3 percent, the gap would be 1 percent (3 * 1/3 = 1).

Question 12

Taken together, the Phillips curve and Okun's law imply there is a short-term ________ relationship between ________ and inflation.
A) positive; interest rates
B) positive; unemployment
C) negative; interest rates
D) negative; unemployment
E) Not enough information is given.

Accepted Answer

The Phillips curve suggests a negative relationship between unemployment and inflation, meaning as unemployment decreases, inflation increases. Okun's law, on the other hand, suggests a negative relationship between unemployment and GDP, meaning as unemployment decreases, GDP increases. Therefore, there is a short-term negative relationship between unemployment and inflation.

Question 13

Defining u as the unemployment rate and  as the natural rate of unemployment, we can write Okun's law as the following equation:
A)  .
B)  .
C)  .
D)  .
E)  .

Accepted Answer

The answer of Defining u as the unemployment rate and...

Question 14

According to Okun's law, if the Federal Reserve wants to reduce unemployment, it should ________ interest rates, which would ________ output.
A) reduce; reduce
B) increase; increase
C) reduce; increase
D) reduce; not change
E) not change; increase

Accepted Answer

According to Okun's law, there is an inverse relationship between unemployment and output. Therefore, to reduce unemployment, the Federal Reserve should increase output. One way to do this is by reducing interest rates to encourage borrowing and investment, leading to increased production and output.

Question 15

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015  (Source: Bureau of Labor Statistics)
-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 1998 to 2000 was a period of:
A) stagnation.
B) a slumping economy.
C) a booming economy.
D) None of these answers is correct.
E) Not enough information is given.

Accepted Answer

According to the Phillips curve, there is an inverse relationship between unemployment and inflation. During the period from about 1998 to 2000, unemployment was relatively low and the economy was growing at a steady rate, leading to a booming economy with somewhat higher inflation rates. Therefore, choice C is the correct answer.

Question 16

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015  (Source: Bureau of Labor Statistics)
-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2003 to 2005 was a period of:
A) a slumping economy.
B) a booming economy.
C) stagnation.
D) None of these answers is correct.
E) Not enough information is given.

Accepted Answer

According to the Phillips curve, there is an inverse relationship between inflation and unemployment, meaning when inflation is low, unemployment will be high, and when inflation is high, unemployment will be low. Therefore, when there is a low inflation rate, it is likely that the economy is in a slumping state, and when there is a high inflation rate, it is likely that the economy is booming. From Figure 9.5, we can see that the period from 2003 to 2005 had a relatively high inflation rate, indicating a booming economy.

Question 17

Okun's law shows the ________ relationship between ________ and ________.
A) negative; the unemployment gap; economic fluctuations
B) positive; the unemployment gap; economic fluctuations
C) negative; the unemployment gap; inflation
D) positive; the unemployment gap; inflation
E) negative; inflation; economic fluctuations

Accepted Answer

Okun's law demonstrates a negative relationship between the unemployment gap (the difference between actual and natural rates of unemployment) and economic fluctuations (measured as changes in real GDP). When the economy grows faster than its potential (positive economic fluctuations), the unemployment gap decreases, and vice versa.

Question 18

If an economy has a horizontal Phillips curve and experiences an expansion, inflation:
A) falls.
B) rises sharply.
C) rises, but not very much.
D) does not change.
E) falls sharply.

Accepted Answer

A horizontal Phillips curve means there is no trade-off between inflation and unemployment, so an expansion in the economy will not lead to any change in inflation.

Question 19

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the gap is 6 percent, the change in inflation would be ________ percent.
A) 1/4; 1.5
B) 1/3; 12
C) 1/3; 2
D) 1/2; 3
E) 1/2; 12

Accepted Answer

The Phillips curve represents the relationship between unemployment and inflation. A slope of 1/3 means that for every 1% increase in the unemployment gap, inflation would decrease by 1/3%. Therefore, a 6% gap would result in a 2% change in inflation (6 * 1/3 = 2).

Question 20

Taken together, the Phillips curve and Okun's law imply there is a ________ relationship between ________ and unemployment.
A) positive; inflation
B) negative; inflation
C) negative; interest rates
D) positive; interest rates
E) Not enough information is given.

Accepted Answer

The Phillips curve shows a negative relationship between inflation and unemployment, while Okun's law shows a negative relationship between GDP growth and unemployment. As inflation and GDP growth are positively correlated, this means there is a negative relationship between inflation (or GDP growth) and unemployment, as shown by the Phillips curve and Okun's law. Therefore, the correct choice is B, negative relationship between inflation and unemployment.

Quiz 9: An Introduction to the Short Run

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law, is ________ percent.

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2009 to 2010 was a period of:

In 1979, the inflation rate reached about 14 percent, due in part to . The Board of Governors of the Federal Reserve under decided to interest rates, sending the economy into a .

In the text, Okun's law is given as:

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, is ________ percent.

Defining u as the unemployment rate and as the natural rate of unemployment, Okun's law is given by the following equation:

Consider two economies. Economy 1 has a steep Phillips curve and Economy 2 has a gently sloped Phillips curve. If each economy experiences an identical economic expansion, the change in would increase less in Economy .

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2001 to 2002 was a period of:

Yale professor Ray Fair uses to predict .

According to Okun's law, if the Federal Reserve wants to increase unemployment, it should interest rates, which would output.

According to the text, the slope of the Phillips curve in the United States is about . Thus, if the change in inflation is 3 percent, the gap would be percent.

Taken together, the Phillips curve and Okun's law imply there is a short-term relationship between and inflation.

Defining u as the unemployment rate and as the natural rate of unemployment, we can write Okun's law as the following equation:

According to Okun's law, if the Federal Reserve wants to reduce unemployment, it should interest rates, which would output.

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 1998 to 2000 was a period of:

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2003 to 2005 was a period of:

Okun's law shows the relationship between and .

If an economy has a horizontal Phillips curve and experiences an expansion, inflation:

According to the text, the slope of the Phillips curve in the United States is about . Thus, if the gap is 6 percent, the change in inflation would be percent.

Taken together, the Phillips curve and Okun's law imply there is a relationship between and unemployment.