Chapter 8
Study Questions
1)
In the Phillips curve equation, which of the
following will NOT cause a reduction in the
current inflation rate?
(a) a reduction in the expected inflation rate
(b) an increase in the markup, e
(c) an increase in the unemployment rate
(d) all of the above
(e) none of the above
2)
Which of the following statements will likely
be correct when inflation has not been very
persistent?
(a) The current inflation rate will not depend
heavily on past years' inflation rates.
(b) Lower unemployment rates will be
associated with higher inflation rates.
(c) The expected price level for a given year
will equal the previous year's actual price
level.
(d) all of the above
(e) none of the above
3)
high but stable rates of inflation.
reductions in the inflation rate.
low but stable rates of inflation.
high natural rates of unemployment.
low natural rates of unemployment.
For this question, assume that the expected rate
of inflation is a function of past year's
inflation. Also assume that the unemployment
rate has been equal to the natural rate of
unemployment for a number of years. Given
this information, we know that:
(a) the rate of inflation should neither
increase nor decrease.
For this question, assume that the Phillips
curve equation is represented by the following
equation: πt - πt-1 = (e + z) - αut. Given this
information, the natural rate of unemployment
will be equal to:
(a)
(b)
(c)
(d)
(e)
7)
e + z.
α(e + z).
0.
(e + z - α).
none of the above
Which of the following will NOT cause a
reduction in the natural rate of unemployment?
(a)
(b)
(c)
(d)
a reduction in z
a reduction in e
an increase in α
a reduction in the expected inflation
rate
(e) none of the above
8)
For this question, assume that the Phillips
curve equation is represented by the following
equation: πt - πt-1 = (e + z) - αut. An increase in
the unemployment rate will cause:
(a) an increase in the markup over labor costs.
(b) an increase in the inflation rate over time.
(c) a reduction in the markup over labor costs
(i.e., a reduction in e).
(d) a decrease in the inflation rate over
time.
(e) none of the above
5)
6)
When inflation has been persistent, high
unemployment rates will likely be associated
with:
(a)
(b)
(c)
(d)
(e)
4)
(b) the rate of inflation will approximately be
equal to zero.
(c) the rate of inflation should steadily
increase over time.
(d) the rate of inflation should steadily
decrease.
(e) the inflation rate will be approximately
equal to the natural rate of unemployment.
When a worker's nominal wage is indexed, the
nominal wage is usually automatically adjusted
based on movements in which of the following
variables?
(a)
(b)
(c)
(d)
(e)
9)
the price level
the price of the firm's product
the average wage in the country
productivity
the average wage in the industry
Which of the following will tend to occur
when a high proportion of a country's workers
have indexed wages?
(a) The unemployment rate will be relatively
high.
(b) The unemployment rate will be relatively
low.
(c) The inflation rate will be relatively low.
(d) A given change in the unemployment
rate will cause a larger change in the
inflation rate.
(e) none of the above
Chapter 8
Study Questions
10)
Suppose policy makers underestimate the
natural rate of unemployment. In situations
like these, policy makers will likely implement
policies that result in:
14)
(a) a higher inflation rate than necessary.
(b) overly restrictive monetary and fiscal
policy.
(c) a steadily decreasing inflation rate.
(d) more unemployment than necessary.
(e) an unemployment rate that is "too high."
11)
Assume that expected inflation is based on the
following: πet = θπt-1. If θ = 0, we know that:
(a) the Phillips curve illustrates the
relationship between the level of
inflation rate and the level of the
unemployment rate.
(b) a reduction in the unemployment rate will
have no effect on inflation.
(c) low rates of unemployment will cause
steadily increasing rates of inflation.
(d) high rates of unemployment will cause
steadily declining rates of inflation.
12)
Assume that expected inflation is based on the
following: πet = θπt-1. If θ = 1, we know that:
(a) low rates of unemployment will cause
steadily increasing rates of inflation.
(b) the Phillips curve illustrates the
relationship between the level of inflation
rate and the level of the unemployment
rate.
(c) the actual unemployment rate will not
deviate from the natural rate of
unemployment.
(d) a reduction in the unemployment rate will
have no effect on inflation.
13)
As the proportion of labor contracts that index
wages to prices declines, we would expect
that:
(a) nominal wages will become more
sensitive to changes in unemployment.
(b) a reduction in the unemployment rate
will now have a smaller effect on
inflation.
(c) the natural rate of unemployment will
decrease.
(d) the natural rate of unemployment will
increase.
Suppose the Phillips curve is represented by
the following equation: πt - πt-1 = 20 - 2ut.
Given this information, we know that the
natural rate of unemployment in this economy
is:
(a)
(b)
(c)
(d)
(e)
15)
20%.
5%.
6.5%.
10%.
none of the above
Suppose the Phillips curve is represented by
the following equation: πt - πt-1 = 20 - 2ut.
Given this information, which of the following
is most likely to occur if the actual
unemployment in any period is equal to 6%?
(a) The rate of inflation will be constant.
(b) The rate of inflation will tend to decrease.
(c) The rate of inflation will tend to
increase.
(d) none of the above