Question 1

When inflation is very low, how do workers and firms adjust their expectations of inflation?

Accepted Answer

The answer of When inflation is very low, how do...

Question 2

During which of the following time periods did inflation remain above 5 percent every year?

Accepted Answer

The time period of 1973 through 1982 saw inflation remain above 5 percent every year due to the oil embargo and rising energy costs which led to stagflation. The other options did not have inflation rates above 5 percent every year.

Question 3

In which of the following situations might you expect expansionary monetary policy to reduce the unemployment rate?

Accepted Answer

The answer of In which of the following situations might...

Question 4

If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?

Accepted Answer

The answer of If workers accurately predict the rate of...

Question 5

If wages and prices adjust slowly, we would expect expansionary monetary policy to be

Accepted Answer

When wages and prices adjust slowly, expansionary monetary policy is more likely to affect the unemployment rate because it takes time for prices and wages to adjust to the increased money supply, leading to lower real wages and higher employment in the short run.

Question 6

Figure 13.6  Alt text for Figure 13.6: In figure 13.6, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.6: The x-axis is labelled, unemployment rate percent.The y-axis is labelled, inflation rate percent per year.A straight line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the end of the x-axis.A straight line labelled, long-run Philips Curve is perpendicular to the x-axis, and begins from the x-axis value 5.Long-run Philips Curve intersects the short-run Philips Curve at point A (5, 2), near the bottom of the line and passes through point C (5, 4.8%)near the top end.Point B (3%, 4.8%)is plotted near the left end of the short-run Philips Curve, with the same y-axis value as point C.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.6.If firms and workers have rational expectations, an expansionary monetary policy will cause the short-run equilibrium to move from

Accepted Answer

The answer of Figure 13.6  Alt text for Figure...

Question 7

According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest?

Accepted Answer

The gains to accurately forecasting inflation are highest when inflation is high and unstable because it is under these conditions that the cost of making errors in inflation forecasts is greatest. High and unstable inflation makes financial planning and contract negotiation particularly challenging, increasing the value of accurate forecasts.

Question 8

If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada,

Accepted Answer

When firms and workers have rational expectations, they are able to anticipate and adjust to any changes in the policy used by the Bank of Canada. This means that any expansionary monetary policy will be anticipated, and therefore, will be offset by increased inflation expectations, leading to higher nominal interest rates. As a result, the effectiveness of expansionary monetary policy is reduced and may even be completely ineffective. Therefore, choice B is the best answer.

Question 9

If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have

Accepted Answer

If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have adaptive expectations. This means that their expectations are based on past experiences and they adjust their expectations as they observe new information.

Question 10

Models that focus on factors such as technology shocks rather than "monetary" explanations of fluctuations in real GDP are called

Accepted Answer

Real business cycle models focus on technology shocks and other non-monetary factors as sources of fluctuations in real GDP.

Question 11

When individuals use all available information about an economic variable to make a decision, expectations are

Accepted Answer

When individuals use all available information about an economic variable to make a decision, their expectations are considered rational because they are based on the best available information at the time. It does not necessarily mean that their expectations are always 100% accurate or that they cannot change in the future as new information becomes available. It simply means that the expectations are based on a thoughtful and informed analysis of the available information.

Question 12

If workers and firms know that the Bank of Canada is following an expansionary monetary policy, workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________.

Accepted Answer

When the Bank of Canada follows an expansionary monetary policy, workers and firms expect inflation to increase. They will adjust nominal wages upwards to maintain the purchasing power of their wages, meaning the real wage (wage adjusted for inflation) remains unchanged.

Question 13

If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?

Accepted Answer

If actual inflation is greater than expected inflation, then the nominal wage will not have adjusted to the higher inflation rate yet, leading to a decrease in the real wage (nominal wage adjusted for inflation) compared to what was expected. Therefore, the actual real wage will be lower than the expected real wage.

Question 14

In the long run, the Bank of Canada may decrease the unemployment rate only if it is willing to increase the rate of inflation.

Accepted Answer

The Bank of Canada can influence unemployment and inflation through monetary policy, but it does not have to increase inflation to decrease unemployment. The relationship between inflation and unemployment, described by the Phillips Curve, suggests that only in the short run might lower unemployment be associated with higher inflation. In the long run, monetary policy can aim for low and stable inflation, which can coexist with low unemployment if the economy is operating at its potential output.

Question 15

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by

Accepted Answer

Lucas and Sargent's theory, part of the New Classical Economics, suggests that the short-run trade-off between unemployment and inflation, often represented by the Phillips curve, can occur because workers and firms are temporarily fooled by unexpected changes in monetary policy. They do not immediately realize that a change has occurred, leading to short-term adjustments in employment and inflation until expectations adjust to the new reality.

Question 16

If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, the short-run Phillips curve will be

Accepted Answer

If firms and workers have rational expectations and knowledge of the policy being used by the Bank of Canada, they will anticipate any changes in monetary policy and adjust their behavior accordingly. This means that the short-run Phillips curve will be vertical, indicating that there is no trade-off between inflation and unemployment in the short run. This occurs because any attempt by the central bank to reduce unemployment through expansionary monetary policy is anticipated by workers and firms, leading to higher inflation without any significant reduction in unemployment.

Question 17

Some economists argue that the short-run Phillips curve is not vertical, and that monetary policy can be effective in the short run.Which one of the following is not one of the reasons for this skepticism?

Accepted Answer

The skepticism about the short-run Phillips curve being vertical is not due to empirical evidence showing workers and firms have rational expectations. This reason actually supports the argument that monetary policy can be effective in the short run, as it suggests that workers and firms adjust their expectations based on available information, which can lead to a non-vertical short-run Phillips curve.

Question 18

Use the following information to draw a graph showing the short-run and long-run Phillips curves, and be sure your graph shows the point where the short-run and long-run Phillips curves intersect.
Natural rate of unemployment = 4 percent
Current rate of unemployment = 5 percent
Expected inflation rate = 3 percent
Current inflation rate = 2 percent

Accepted Answer

The answer of Use the following information to draw a...

Question 19

Which of the following would be the source of a "real" business cycle?

Accepted Answer

Changes in technology can lead to shifts in productivity and capital accumulation, which can result in fluctuations in output, employment, and other economic variables. This is a common source of real business cycles. The other options are related to monetary or fiscal policy, which are not considered to be sources of real business cycles.

Question 20

Figure 13.6  Alt text for Figure 13.6: In figure 13.6, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.6: The x-axis is labelled, unemployment rate percent.The y-axis is labelled, inflation rate percent per year.A straight line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the end of the x-axis.A straight line labelled, long-run Philips Curve is perpendicular to the x-axis, and begins from the x-axis value 5.Long-run Philips Curve intersects the short-run Philips Curve at point A (5, 2), near the bottom of the line and passes through point C (5, 4.8%)near the top end.Point B (3%, 4.8%)is plotted near the left end of the short-run Philips Curve, with the same y-axis value as point C.The points are connected to their respective coordinates on the x and y-axes with dotted lines.
-Refer to Figure 13.6.If firms and workers have adaptive expectations, an expansionary monetary policy will cause the short-run equilibrium to move from

Accepted Answer

With adaptive expectations, when the central bank pursues an expansionary monetary policy, firms and workers adjust their expectations based on past inflation rates. Initially, they may not fully anticipate the inflationary impact of the policy. As a result, real wages may temporarily fall, leading firms to increase hiring and production. This moves the economy from a lower output level to a higher one in the short run, corresponding to moving from point A (initial equilibrium) to point B (new short-run equilibrium with higher output and employment).

Quiz 13: Inflation, Unemployment, and Bank of Canada Policy