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Exam 28: Inflation, unemployment, and Federal Reserve Policy

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Question 21

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Use the information below to explain adjustments that move the economy to a long-run equilibrium.Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 6%. Last year's inflation rate = 3%. This year's inflation rate = 4%.

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If firms and workers have adaptive expec...

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Question 22

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Figure 28-2 -Refer to Figure 28-2.Suppose the economy is at point B in the figure above.Which of the following is true?

A) The expected rate of inflation is 3%.
B) The natural rate of unemployment is 3.8%.
C) The current unemployment rate is 5%.
D) The economy is producing at potential GDP.
E) Expected inflation and actual inflation are the same.

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Question 23

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Figure 28-7 -Refer to Figure 28-7.Consider the Phillips curves depicted in the graph above.The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year,and it succeeds.If expectations of inflation are reduced to 8 percent by the Fed's announcement,the rate of unemployment will be ________ in the short run.

When unemployment is above its natural rate,the inflation rate will eventually

If firms and workers have adaptive expectations,what impact will contractionary monetary policy have on inflation,unemployment,and the Phillips curve?

Real business cycle models argue that fluctuations in real GDP are caused by unanticipated changes in the money supply.

According to the "rational expectations" school of thought in macroeconomics,the short-run Phillips curve is ________ in face of anticipated changes in monetary policy.

An increase in the inflation rate increases employment only if the increase in inflation is unexpected.

In the decade of the ________,A.W.Phillips plotted data for Great Britain which revealed a relationship between rates of changes in wages versus unemployment rates.Economists later discovered other "Phillips Curve" relationships between rates of inflation versus unemployment rates.

When unemployment is below its natural rate,the inflation rate will eventually

Article Summary In a July 2015 interview on CNBC,Republican Senator Pat Toomey expressed concern that interest rates remained low and that it was time for the Fed to announce a date for interest rates to rise and to stick with that date.In the interview,Toomey stated "The Fed no longer has credibility,and you can see that.The divergence between the futures markets and the Fed's own projections about what they're going to do about interest rates-this is a huge problem." A member of the Senate banking committee,Toomey has called on the Fed to adopt a rule which would require it to explain how monetary policy would be set,as well as explain to Congress any reasons for deviations from the rule.In a 1977 amendment to the Federal Reserve Act,Congress has mandated that the Fed act to maintain stable prices,maximize employment,and stabilize long-term interest rates. -Refer to the Article Summary.If the Federal Reserve's announcements about upcoming monetary policy decisions are not seen as credible,as Senator Pat Toomey alludes to regarding the Fed's changing projections as to when they would increase interest rates,which of the following would you expect to see?

Goodyear benefitted when the Federal Reserve slashed the federal funds rate to near-zero levels in 2008.Lower interest rates increased demand for its tires,which would allow Goodyear to ________ employment and ________ prices.

If workers and firms have rational expectations,they understand that ________ monetary policy will raise the inflation rate,so actual inflation ________ expected inflation.

According to the short-run Phillips curve,the unemployment rate and the inflation rate are

If inflation falls from 11% to 5%,there is deflation.

Employees at the university have negotiated a 5 percent increase in wages for the next year,based on their inflation expectations.If inflation is actually 6 percent over the next year,which of the following will occur?

Figure 28-2 -Refer to Figure 28-2.At which point are inflation expectations equal to the actual inflation rate?

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

Why is the credibility of the Fed's policy announcements particularly important?

A decrease in cyclical unemployment will