Q: Which equation correctly calculates the real wage given a nominal wage and price level?

$$\text{Real wage} = \text{Nominal wage} \times \frac{100}{\text{Price level}}$$

Question 1

Which of the following best describes the short-run trade-off between unemployment and inflation as depicted by the Phillips curve?

Accepted Answer

Higher inflation is associated with lower unemployment in the short run, and vice versa.

Question 2

According to Milton Friedman and Edmund Phelps, what is the shape of the long-run Phillips curve, and why?

Accepted Answer

Vertical, because in the long run, unemployment returns to its natural rate regardless of inflation.

Question 3

Suppose GM and the UAW agree to a nominal wage of $50 per hour for 2026, expecting a price level increase from 120.0 to 123.6. What is the expected real wage?

Accepted Answer

$40.45

Question 4

If actual inflation is greater than expected inflation, what happens to the real wage and unemployment rate?

Accepted Answer

Real wage decreases and unemployment rate falls.

Question 5

Which equation correctly calculates the real wage given a nominal wage and price level?

Accepted Answer

$$	ext{Real wage} = 	ext{Nominal wage} 	imes \frac{100}{	ext{Price level}}$$

Question 6

What is the nonaccelerating inflation rate of unemployment (NAIRU)?

Accepted Answer

The unemployment rate at which inflation remains stable.

Question 7

Which of the following would likely cause the natural rate of unemployment to change?

Accepted Answer

A change in labor market institutions, such as increased unionization.

Question 8

How do rational expectations affect the effectiveness of monetary policy in influencing unemployment?

Accepted Answer

Rational expectations cause the short-run Phillips curve to become vertical, reducing the effectiveness of monetary policy.

Question 9

During the 1970s, what event caused a supply shock that shifted the short-run aggregate supply (SRAS) curve and the short-run Phillips curve?

Accepted Answer

Actions by the Organization of Petroleum Exporting Countries (OPEC) raising oil prices.

Question 10

Which of the following is a key argument in favor of central bank independence?

Accepted Answer

It reduces the risk of high inflation caused by political pressure for 'easy' money.

Question 11

If the Federal Reserve wants to preempt inflation based on unemployment data, which type of monetary policy would it use?

Accepted Answer

Contractionary monetary policy.

Question 12

Which of the following best explains why the Phillips curve shifted up during the COVID-19 pandemic?

Accepted Answer

Temporary aggregate supply shocks and expansionary policies increased short-run inflation.

Question 13

What is the main difference between real business cycle models and traditional monetary explanations of GDP fluctuations?

Accepted Answer

Real business cycle models focus on real factors like technology shocks.

Question 14

Which policy change did Alan Greenspan oversee during his term as Fed Chair?

Accepted Answer

A shift from targeting the money supply to focusing on interest rates.

Question 15

If the Fed raises the federal funds rate to combat inflation, what is the most likely short-run effect on aggregate demand?

Accepted Answer

Aggregate demand will decrease.

Question 16

Which of the following is NOT a plausible reason for a change in the natural rate of unemployment?

Accepted Answer

A temporary increase in inflation.

Question 17

What is the main consequence of workers failing to accurately forecast inflation?

Accepted Answer

Firms can increase wages by less than inflation, reducing real wages without losing workers.

Question 18

Which of the following central banks targets the interest rate for overnight loans as its main policy tool?

Accepted Answer

Bank of Canada

Question 19

If the Fed announces a contractionary monetary policy and follows through, what is the expected effect on its credibility?

Accepted Answer

Credibility increases because the Fed is consistent and transparent.

Inflation, Unemployment, and Federal Reserve Policy: The Phillips Curve and Modern Central Banking

Study Guide - Practice Questions

Study Guide - Flashcards