Macroeconomics 6/e Chapter 12 UNEMPLOYMENT & INFLATION

question

The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

answer

A.W. Phillips.

question

Phillips's research looked at British data on

answer

unemployment and nominal wage growth.

question

The negative relationship between unemployment and inflation is known as the

answer

Phillips curve.

question

The Phillips curve appeared to fit the data well for the United States in the

answer

1960s.

question

Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between

answer

unanticipated inflation and cyclical unemployment.

question

Milton Friedman and Edmund Phelps questioned

answer

the stability of the relationship between inflation and unemployment.

question

In the extended classical model, an anticipated decrease in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

remain unchanged; decrease

question

In the extended classical model, an unanticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

increase; increase

question

In the extended classical model, an unexpected decrease in aggregate demand would cause unanticipated inflation to be ________ and cyclical unemployment to be ________.

answer

negative; positive

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.03 when π e = 0.06 and u = 0.06, then =

answer

0.05.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.06 when π e = 0.06 and u = 0.04, then =

answer

0.04.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.09 when π e = 0.06 and u = 0.02, then =

answer

0.03.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.06). When π = 0.06 and π e = 0.03, the unemployment rate is

answer

0.05.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.05). When π = 0.06 and π e = 0.03, the unemployment rate is

answer

0.04.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.05). When π = 0.03 and π e = 0.06, the unemployment rate is

answer

0.06.

question

The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a

answer

given expected rate of inflation.

question

Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%. Instead, the Fed increases the money supply by 5%. In the short run, this would cause actual output to be ________ full-employment output and prices to increase by ________ 3%.

answer

above; more than

question

An increase in the expected rate of inflation would

answer

shift the Phillips curve upward.

question

If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

answer

shift the Phillips curve to the left.

question

If the expected rate of inflation rose at the same time the natural rate of unemployment rose, the Phillips curve

answer

would shift up.

question

A beneficial supply shock would cause

answer

the short-run Phillips curve to shift downward and to the left.

question

Classicals argue that an adverse supply shock would

answer

raise both the natural rate of unemployment and the actual rate of unemployment.

question

Historically, Brazil has suffered higher and more variable rates of inflation than Venezuela. You would expect the short-run aggregate supply curve of Brazil to be ________ than that of Venezuela, and the Phillips curve of Brazil to be ________ than that of Venezuela.

answer

steeper; steeper

question

The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

answer

as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

question

The Phillips curve shifted during the 1970s primarily because of

answer

the two large oil price shocks.

question

Examining data on cyclical unemployment plotted against unanticipated inflation shows

answer

a negative relationship.

question

The Friedman-Phelps analysis suggests that there is a long-term relationship between

answer

unanticipated inflation and cyclical unemployment.

question

An analysis of the American economy since 1960 shows that there is a stable relationship between inflation and unemployment

answer

only in the short run.

question

Both classicals and Keynesians agree that policymakers

answer

cannot keep the unemployment rate permanently below the natural rate
by permanently running a high rate of inflation.

question

The Lucas critique is an objection to the assumption that

answer

historical relationships between macroeconomic variables will continue to hold after new
policies are in place

question

The argument that when policy changes, people's behavior changes so that historical relationships between macroeconomic variables will no longer hold is known as

answer

the Lucas critique.

question

The long-run Phillips curve is

answer

vertical.

question

The fact that the long-run Phillips curve is vertical implies that

answer

money is neutral in the long run.

question

When the economy goes into a recession, there's an increase in

answer

cyclical unemployment.

question

According to Okun's law, if full-employment output is $5000 billion, then each percentage point of unemployment sustained for one year reduces output by

answer

$100 billion.

question

Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

answer

it ignores the fact that leisure increases during a recession.

question

The natural rate of unemployment in the United States generally ________ from 1960 to 1980 and ________ from 1980 to 1995.

answer

rose; fell

question

One reason for the fall in the natural rate of unemployment since 1980 is

answer

changes in the demographic composition of the work force.

question

The bulk of the decline in the natural rate of unemployment since 1980 is because of

answer

a decline in the share of young workers in the labor force.

question

A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

answer

the natural rate of unemployment is hard to measure.

question

Because the natural rate of unemployment is not known precisely, policymakers who use it as a guide for policy must be

answer

less aggressive with policy changes than they would be if they knew the value of the natural rate.

question

One cost of a perfectly anticipated inflation is that it

answer

increases menu costs.

question

The costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation are called

answer

shoe leather costs.

question

Shoe leather costs are

answer

the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.

question

When actual inflation is greater than expected inflation

answer

there are transfers from lenders to borrowers.

question

One cost of an unanticipated inflation is that it

answer

transfers wealth from lenders to borrowers.

question

A COLA is

answer

a cost of living adjustment.

question

Hyperinflation occurs when

answer

the inflation rate is extremely high.

question

The reduction of the inflation rate is called

answer

disinflation.

question

The costs of disinflation would be low if

answer

expected inflation falls as inflation falls.

question

A rapid and decisive reduction in the rate of growth of the money supply for the purpose of disinflation is called

answer

a cold turkey policy.

question

Keynesians prefer a disinflation policy of

answer

gradualism

question

The sacrifice ratio is

answer

the amount of output lost when the inflation rate is reduced by one percentage point.

question

The amount of output lost when the inflation rate is reduced by one percentage point is called

answer

the sacrifice ratio.

question

Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about

answer

question

Ball's research showed that the sacrifice ratio

answer

varied considerably across countries.

question

Ball found that an important factor affecting the sacrifice ratio is

answer

the flexibility of the labor market.

question

Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

answer

a high

question

Countries in which wages adjust rapidly to changes in the supply and demand for labor are likely to have ________ sacrifice ratio.

answer

a low

question

Countries in which the government does not regulate the labor market are likely to have ________ sacrifice ratio.

answer

a low

question

Ball's research on disinflation across different countries found that

answer

costs of disinflation were smaller for rapid disinflation than for gradual disinflation.

question

If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is best accomplished by

answer

a cold-turkey approach.

question

a cold-turkey approach.

answer

the credibility of the central bank.

question

Inflation expectations in the United States generally

answer

rose from 1971 to 1982, then fell from 1982 to 2000, and have been stable since then.

1 of 64

question

The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

answer

A.W. Phillips.

question

Phillips's research looked at British data on

answer

unemployment and nominal wage growth.

question

The negative relationship between unemployment and inflation is known as the

answer

Phillips curve.

question

The Phillips curve appeared to fit the data well for the United States in the

answer

1960s.

question

Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between

answer

unanticipated inflation and cyclical unemployment.

question

Milton Friedman and Edmund Phelps questioned

answer

the stability of the relationship between inflation and unemployment.

question

In the extended classical model, an anticipated decrease in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

remain unchanged; decrease

question

In the extended classical model, an unanticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

increase; increase

question

In the extended classical model, an unexpected decrease in aggregate demand would cause unanticipated inflation to be ________ and cyclical unemployment to be ________.

answer

negative; positive

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.03 when π e = 0.06 and u = 0.06, then =

answer

0.05.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.06 when π e = 0.06 and u = 0.04, then =

answer

0.04.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - ). If π = 0.09 when π e = 0.06 and u = 0.02, then =

answer

0.03.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.06). When π = 0.06 and π e = 0.03, the unemployment rate is

answer

0.05.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.05). When π = 0.06 and π e = 0.03, the unemployment rate is

answer

0.04.

question

In the expectations-augmented Phillips curve, π = π e - 3(u - 0.05). When π = 0.03 and π e = 0.06, the unemployment rate is

answer

0.06.

question

The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a

answer

given expected rate of inflation.

question

answer

above; more than

question

An increase in the expected rate of inflation would

answer

shift the Phillips curve upward.

question

If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

answer

shift the Phillips curve to the left.

question

If the expected rate of inflation rose at the same time the natural rate of unemployment rose, the Phillips curve

answer

would shift up.

question

A beneficial supply shock would cause

answer

the short-run Phillips curve to shift downward and to the left.

question

Classicals argue that an adverse supply shock would

answer

raise both the natural rate of unemployment and the actual rate of unemployment.

question

answer

steeper; steeper

question

The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

answer

as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

question

The Phillips curve shifted during the 1970s primarily because of

answer

the two large oil price shocks.

question

Examining data on cyclical unemployment plotted against unanticipated inflation shows

answer

a negative relationship.

question

The Friedman-Phelps analysis suggests that there is a long-term relationship between

answer

unanticipated inflation and cyclical unemployment.

question

An analysis of the American economy since 1960 shows that there is a stable relationship between inflation and unemployment

answer

only in the short run.

question

Both classicals and Keynesians agree that policymakers

answer

cannot keep the unemployment rate permanently below the natural rate
by permanently running a high rate of inflation.

question

The Lucas critique is an objection to the assumption that

answer

historical relationships between macroeconomic variables will continue to hold after new
policies are in place

question

The argument that when policy changes, people's behavior changes so that historical relationships between macroeconomic variables will no longer hold is known as

answer

the Lucas critique.

question

The long-run Phillips curve is

answer

vertical.

question

The fact that the long-run Phillips curve is vertical implies that

answer

money is neutral in the long run.

question

When the economy goes into a recession, there's an increase in

answer

cyclical unemployment.

question

According to Okun's law, if full-employment output is $5000 billion, then each percentage point of unemployment sustained for one year reduces output by

answer

$100 billion.

question

Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

answer

it ignores the fact that leisure increases during a recession.

question

The natural rate of unemployment in the United States generally ________ from 1960 to 1980 and ________ from 1980 to 1995.

answer

rose; fell

question

One reason for the fall in the natural rate of unemployment since 1980 is

answer

changes in the demographic composition of the work force.

question

The bulk of the decline in the natural rate of unemployment since 1980 is because of

answer

a decline in the share of young workers in the labor force.

question

A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

answer

the natural rate of unemployment is hard to measure.

question

Because the natural rate of unemployment is not known precisely, policymakers who use it as a guide for policy must be

answer

less aggressive with policy changes than they would be if they knew the value of the natural rate.

question

One cost of a perfectly anticipated inflation is that it

answer

increases menu costs.

question

The costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation are called

answer

shoe leather costs.

question

Shoe leather costs are

answer

the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.

question

When actual inflation is greater than expected inflation

answer

there are transfers from lenders to borrowers.

question

One cost of an unanticipated inflation is that it

answer

transfers wealth from lenders to borrowers.

question

A COLA is

answer

a cost of living adjustment.

question

Hyperinflation occurs when

answer

the inflation rate is extremely high.

question

The reduction of the inflation rate is called

answer

disinflation.

question

The costs of disinflation would be low if

answer

expected inflation falls as inflation falls.

question

A rapid and decisive reduction in the rate of growth of the money supply for the purpose of disinflation is called

answer

a cold turkey policy.

question

Keynesians prefer a disinflation policy of

answer

gradualism

question

The sacrifice ratio is

answer

the amount of output lost when the inflation rate is reduced by one percentage point.

question

The amount of output lost when the inflation rate is reduced by one percentage point is called

answer

the sacrifice ratio.

question

Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about

answer

question

Ball's research showed that the sacrifice ratio

answer

varied considerably across countries.

question

Ball found that an important factor affecting the sacrifice ratio is

answer

the flexibility of the labor market.

question

Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

answer

a high

question

Countries in which wages adjust rapidly to changes in the supply and demand for labor are likely to have ________ sacrifice ratio.

answer

a low

question

Countries in which the government does not regulate the labor market are likely to have ________ sacrifice ratio.

answer

a low

question

Ball's research on disinflation across different countries found that

answer

costs of disinflation were smaller for rapid disinflation than for gradual disinflation.

question

If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is best accomplished by

answer

a cold-turkey approach.

question

a cold-turkey approach.

answer

the credibility of the central bank.

question

Inflation expectations in the United States generally

answer

rose from 1971 to 1982, then fell from 1982 to 2000, and have been stable since then.

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