Question 1

A decrease in the inflation rate is likely to be associated with
A) an increase in the unemployment rate.
B) decreased unemployment benefits.
C) a decreased in the unemployment rate.
D) less unemployment benefits being paid.

Accepted Answer

According to the Phillips Curve, there is typically an inverse relationship between inflation and unemployment, meaning that a decrease in the inflation rate is often associated with an increase in the unemployment rate.

Question 2

By making more or less money available, the Federal Reserve can alter both the nominal and real interest rates in the long run.

Accepted Answer

The Federal Reserve can influence nominal interest rates directly in the short run through its monetary policy actions. However, in the long run, real interest rates are determined by real factors such as productivity and savings rates, not by monetary policy.

Question 3

Suppose workers negotiate for a 5 percent nominal wage increase and expect a 1 percent inflation rate. If the actual inflation rate is 6 percent, then workers
A) and firms are both better off.
B) are better off and firms are worse off.
C) are worse off and firms are better off.
D) and firms are both worse off.

Accepted Answer

Since workers negotiated for a 5 percent nominal wage increase, they expected their wage increase to outpace inflation by 4 percent (5% - 1%). However, if the actual inflation rate is 6 percent, then the real wage increase is only 5 percent - 6 percent = -1 percent. Therefore, the workers are worse off than they expected. On the other hand, firms are better off because they only have to pay a 5 percent nominal wage increase instead of a 6 percent increase.

Question 4

According to the rational expectations theory
A) the public makes consistent errors when forming expectations.
B) only central bankers form expectations rationally.
C) the public, on average, anticipates the future correctly.
D) the public only uses a portion of the available information when forming expectations.

Accepted Answer

The rational expectations theory assumes that individuals use all available information to form their expectations of the future, resulting in accurate predictions on average. Therefore, the public, on average, anticipates the future correctly. Choices A, B, and D are all inconsistent with the theory.

Question 5

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases relative to the expected rate, the unemployment rate
A) decreases.
B) increases.
C) may increase or decrease.
D) does not change.

Accepted Answer

According to the expectations Phillips curve, if the actual inflation rate is lower than the expected inflation rate, the unemployment rate increases. This is because lower-than-expected inflation typically means that real wages are higher than employers anticipated, leading them to hire fewer workers.

Question 6

Increases in unanticipated inflation will impact employment levels, but once workers recognize higher inflation rates, they will incorporate them into their expectations of inflation. This will tend to cause
A) unemployment to fall below the natural rate.
B) unemployment to return to its natural rate.
C) the natural rate of unemployment to rise.
D) the natural rate of unemployment to fall.

Accepted Answer

Unanticipated inflation can cause temporary distortions in the labor market, leading to changes in employment levels. However, once workers realize that inflation rates have increased, they will adjust their expectations accordingly. This adjustment will cause unemployment to return to its natural rate, as workers and firms renegotiate wages and prices. Therefore, the correct answer is option B.

Question 7

Define "money illusion" and explain its cause.

Accepted Answer

The answer of Define "money illusion" and explain its cause....

Question 8

Increases in unanticipated inflation will impact employment levels and would therefore tend to cause
A) unemployment to rise above the natural rate.
B) the natural rate of unemployment to rise.
C) unemployment to fall below the natural rate.
D) the natural rate of unemployment to fall.

Accepted Answer

Increases in unanticipated inflation can lead to lower real wages as employers and workers have not adjusted their expectations. This can temporarily boost hiring, causing unemployment to fall below the natural rate until expectations adjust.

Question 9

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate increases relative to the expected rate, the unemployment rate
A) decreases.
B) increases.
C) may increase or decrease.
D) does not change.

Accepted Answer

According to the expectations Phillips curve, if the actual inflation rate is higher than the expected inflation rate, it typically leads to lower unemployment rates. This is because higher-than-expected inflation can temporarily make labor cheaper for employers, encouraging them to hire more workers, thus reducing unemployment.

Question 10

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will tend to cause nominal wages to ________ and the belief that real wages have ________.
A) increase; increased
B) increase; decreased
C) decrease; increased
D) decrease; decreased

Accepted Answer

When inflation unexpectedly increases, nominal wages tend to increase as workers demand higher pay to keep up with the cost of living. However, if the increase is not fully anticipated, workers might believe their real wages have increased because they see a nominal wage rise without realizing that inflation has eroded their purchasing power.

Question 11

If the public forms their expectations rationally, a credible central bank will
A) tend to encourage wage increases.
B) tend to deter wage increases.
C) have no influence over wages.
D) ignore the public's beliefs.

Accepted Answer

If the public forms their expectations rationally, a credible central bank will tend to deter wage increases by signaling that they will take action to prevent inflation. This is because inflation erodes the value of money and could harm the economy in the long run. A credible central bank will want to maintain low and stable inflation, and deterring wage increases is one way to achieve this.

Question 12

Explain why real and nominal rates of interest will differ when the public expects inflation.

Accepted Answer

The answer of Explain why real and nominal rates of...

Question 13

If the rate of unemployment is equal to the natural rate, the rate of inflation will
A) fall by 1 percent per year
B) rise by 1/2 percent per year.
C) fall by 1/2 percent per year.
D) not change.

Accepted Answer

When the rate of unemployment is equal to the natural rate, it means that the economy is at its potential output level, and hence there is no pressure on prices to rise or fall. Therefore, the rate of inflation will not change.

Question 14

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate
A) decreases.
B) increases.
C) may increase or decrease.
D) does not change.

Accepted Answer

According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate does not change.

Question 15

Explain why money demand will be affected when the public expects inflation.

Accepted Answer

The answer of Explain why money demand will be affected...

Question 16

The difference between the Phillips curve and the expectations Phillips curve is that the
A) expectations Phillips curve takes into account expectations of inflation.
B) Phillips curve takes into account expectations of inflation.
C) Phillips curve is flatter.
D) Phillips curve is steeper.

Accepted Answer

The expectations Phillips curve takes into account expectations of inflation, while the traditional Phillips curve does not. This is the key difference between the two.

Question 17

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will cause
A) anticipated inflation to exceed actual inflation.
B) actual inflation to exceed anticipated inflation.
C) anticipated inflation to equal actual inflation.
D) nominal inflation to exceed real inflation.

Accepted Answer

When the inflation rate unexpectedly increases, workers would not have factored in the sudden increase in their wage demands, which leads to an increase in the cost of production. The firms will try to recover this added cost of production by increasing the prices of the goods, leading to an increase in actual inflation. The workers' expectation of inflation will not change immediately, thereby causing actual inflation to exceed anticipated inflation.

Question 18

If the growth rate of money changes, there will be no long-run effects on real interest rates.

Accepted Answer

In the long run, real interest rates are determined by real factors, such as the productivity of capital and the time preference for consumption. Changes in the growth rate of money will only have a temporary effect on real interest rates.

Question 19

If the growth rate of money changes, there will be short-run effects on real interest rates.

Accepted Answer

A change in the growth rate of money can affect the supply and demand of money, causing changes in the short-term nominal interest rate. The real interest rate, which is adjusted for inflation, can also be impacted in the short-term. However, in the long-run, changes in the growth rate of money have no effect on the real interest rate, as the market adjusts to the new inflation expectation levels.

Question 20

According to the expectations Phillips curve, unemployment varies with
A) unanticipated inflation.
B) anticipated inflation.
C) actual inflation.
D) real inflation.

Accepted Answer

The expectations Phillips curve suggests that unemployment varies with unanticipated inflation because individuals make decisions based on their expectations of inflation, and it is the unexpected inflation that affects employment and output levels.

Quiz 16: The Dynamics of Inflation and Unemployment

A decrease in the inflation rate is likely to be associated with

By making more or less money available, the Federal Reserve can alter both the nominal and real interest rates in the long run.

Suppose workers negotiate for a 5 percent nominal wage increase and expect a 1 percent inflation rate. If the actual inflation rate is 6 percent, then workers

According to the rational expectations theory

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases relative to the expected rate, the unemployment rate

Increases in unanticipated inflation will impact employment levels, but once workers recognize higher inflation rates, they will incorporate them into their expectations of inflation. This will tend to cause

Define "money illusion" and explain its cause.

Increases in unanticipated inflation will impact employment levels and would therefore tend to cause

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate increases relative to the expected rate, the unemployment rate

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will tend to cause nominal wages to and the belief that real wages have .

If the public forms their expectations rationally, a credible central bank will

Explain why real and nominal rates of interest will differ when the public expects inflation.

If the rate of unemployment is equal to the natural rate, the rate of inflation will

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate

Explain why money demand will be affected when the public expects inflation.

The difference between the Phillips curve and the expectations Phillips curve is that the

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will cause

If the growth rate of money changes, there will be no long-run effects on real interest rates.

If the growth rate of money changes, there will be short-run effects on real interest rates.

According to the expectations Phillips curve, unemployment varies with