Question 1

An increase in the expected inflation rate

Accepted Answer

An increase in the expected inflation rate shifts the short-run Phillips curve upward because workers and firms adjust their expectations, leading to higher wage demands and prices at each level of unemployment.

Question 2

If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

Accepted Answer

The inflation rate is calculated as the percentage change in the price level from one year to the next. The formula is: ((New Price Level - Old Price Level) / Old Price Level) * 100. So, ((102 - 100) / 100) * 100 = 2.0 percent.

Question 3

If the expected inflation rate rises, then the short-run Phillips curve _{--------------------}and the long-run Phillips curve_{--------------------} .

Accepted Answer

The short-run Phillips curve shifts because it reflects the trade-off between inflation and unemployment, which is affected by changes in expected inflation. The long-run Phillips curve does not shift because it is vertical, representing the natural rate of unemployment, which is not affected by inflation expectations.

Question 4

The natural rate hypothesis concludes that the inflation rate increases, then in the short run there is

Accepted Answer

In the short run, an increase in the inflation rate leads to an upward movement along the short-run Phillips curve, reflecting a trade-off between inflation and unemployment.

Question 5

Along the long-run Phillips curve the unemployment rate_{--------------------} and the inflation rate_{--------------------} .

Accepted Answer

In the long run, the Phillips curve is vertical at the natural rate of unemployment, indicating that unemployment is equal to the natural rate, while inflation can be any value depending on monetary policy and other factors.

Question 6

Comparing the AS-AD model and the Phillips curve, we see that

Accepted Answer

The AS-AD model uses the price level to show the relationship between aggregate supply and aggregate demand, while the Phillips curve shows the relationship between the rate of inflation and the unemployment rate.

Question 7

Moving along the short-run Phillips curve, if_{--------------------}increases then _{--------------------} decreases.

Accepted Answer

In the short-run Phillips curve, there is an inverse relationship between inflation and unemployment. As inflation increases, unemployment decreases, and vice versa.

Question 8

Okun's Law says that the difference between the unemployment rate and the natural unemployment rate determines

Accepted Answer

Okun's Law states that the difference between the actual unemployment rate and the natural unemployment rate is related to the gap between potential GDP and real GDP.

Question 9

If real GDP exceeds potential GDP, then employment is _{--------------------} full employment and the unemployment rate is _{--------------------}the natural unemployment rate.

Accepted Answer

When real GDP exceeds potential GDP, the economy is operating above full employment, leading to an unemployment rate below the natural unemployment rate.

Question 10

The natural rate hypothesis concludes that when the inflation rate increases, then in the long run there is

Accepted Answer

In the long run, an increase in the inflation rate leads to an upward shift of the short-run Phillips curve as expectations adjust, reflecting the natural rate of unemployment.

Question 11

The short-run Phillips curve is _{--------------------}curve along which an increase in the unemployment rate is associated with _{--------------------}in the inflation rate.

Accepted Answer

The short-run Phillips curve is downward sloping, indicating an inverse relationship between unemployment and inflation: as unemployment increases, inflation tends to decrease.

Question 12

According to _{--------------------} , when real GDP is _{--------------------} percentage points greater than potential GDP, the unemployment rate is one percentage point _{--------------------} the natural unemployment rate.

Accepted Answer

Okun's Law states that for every 2 percentage points by which real GDP exceeds potential GDP, the unemployment rate is typically 1 percentage point below the natural rate.

Question 13

If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, before the expected inflation rate changes, the inflation rate _{--------------------}and the unemployment rate_{--------------------} .

Accepted Answer

When the Fed attempts to lower the unemployment rate below the natural rate, it typically does so by increasing the money supply, which can lead to higher inflation. Initially, this can cause the unemployment rate to fall as businesses hire more due to increased demand.

Question 14

Suppose potential GDP is $100 billion and the natural unemployment rate is 5 percent. If the unemployment rate is 6 percent, then according to Okun's Law real GDP is

Accepted Answer

Okun's Law states that a 1 percentage point increase in the unemployment rate is associated with a 2 percentage point decrease in real GDP. Therefore, if the unemployment rate is 6 percent, then real GDP is 2 percentage points below potential GDP, which is $100 billion. Therefore, real GDP is $98 billion.

Question 15

The long-run Phillips curve is the relationship between

Accepted Answer

The long-run Phillips curve shows the relationship between inflation and unemployment when the economy is at full employment, indicating that in the long run, there is no trade-off between inflation and unemployment.

Question 16

Changes in which of the following do NOT affect the natural unemployment rate?

Accepted Answer

The natural unemployment rate is affected by factors like unemployment benefits, structural changes, demographics, and minimum wage. However, the quantity of money primarily influences cyclical unemployment, not the natural rate.

Question 17

When an economy experiences a recession there is

Accepted Answer

A recession is a period of economic decline, which is typically characterized by a decrease in output and employment. This decrease in output and employment leads to a decrease in the demand for labor, which in turn leads to a decrease in wages. The decrease in wages shifts the short-run Phillips curve downward.

Question 18

Moving along the short-run Phillips curve, as the unemployment rate increases the inflation rate

Accepted Answer

The short-run Phillips curve illustrates an inverse relationship between unemployment and inflation, meaning as unemployment increases, inflation tends to decrease.

Question 19

The natural rate hypothesis concludes that when the inflation rate _{--------------------} unexpectedly increases, the unemployment rate . But when the higher inflation rate becomes the expected inflation rate, the unemployment rate then _{--------------------}until it reaches the _{--------------------} unemployment rate.

Accepted Answer

According to the natural rate hypothesis, an unexpected increase in inflation temporarily decreases unemployment. However, once the higher inflation becomes expected, unemployment returns to the natural rate.

Question 20

The expected inflation rate is the inflation rate that people forecast and use to help set

Accepted Answer

The expected inflation rate is used by people to help set the money wage rate, as it influences wage negotiations and contracts to maintain purchasing power.

Quiz 15: The Short-Run Policy Tradeoff