Question 1

Suppose the central bank increases the policy rate. According to the IS-LM model with risk, what is the most likely sequence of effects on investment, demand, and output?

Accepted Answer

Investment decreases, demand decreases, output decreases

Question 2

Given the Phillips Curve equation $$\pi - \pi^e = -\alpha(u - u_n)$$, what happens to inflation if the unemployment rate $$u is $$below the natural rate $$u_n$$?

Accepted Answer

Inflation increases above expected inflation

Question 3

If the unemployment rate is above the natural unemployment rate, which of the following is true about output and inflation?

Accepted Answer

Output is below potential and inflation falls

Question 4

Consider the formula for output at the natural unemployment rate: $$Y_n = (1-u_n)L. If $$the total labor force $$L = 100$$ and the natural unemployment rate $$u_n = 0.05$$, what is the potential output?

Accepted Answer

$$Y_n = 95$$

Question 5

Which equation correctly expresses the output gap in terms of unemployment rates and labor force?

Accepted Answer

$$(Y - Y_n) = -L(u - u_n)$$

Question 6

If the central bank cuts the policy rate, what is the expected short-run effect on output and inflation according to the PC model?

Accepted Answer

Output rises and inflation rises

Question 7

Suppose oil prices sharply increase. According to the lecture, what is the most likely effect on the natural rate of unemployment and output?

Accepted Answer

Natural unemployment rate rises and output falls

Question 8

Given $$u = \frac{U}{L}$$, where $$U is $$the number of unemployed workers and $$L is $$the total labor force, what happens to the unemployment rate if $$U$$ increases while $$L$$ remains constant?

Accepted Answer

Unemployment rate increases

Question 9

If the government announces a tax rate increase in an economy operating at potential output, what is the expected effect on the IS curve and output?

Accepted Answer

IS curve shifts left, output decreases

Question 10

Which formula correctly relates the number of employed workers $$N to $$the unemployment rate $$u$$ and total labor force $$L$$?

Accepted Answer

$$N = (1-u)L$$

Question 11

If inflation expectations are anchored, what is the central bank less likely to do in response to a temporary oil price shock?

Accepted Answer

Announce a rate hike

Question 12

Given the Phillips Curve $$\pi - \pi^e = -\alpha(u - u_n)$$ and the output gap equation $$(Y - Y_n) = -L(u - u_n)$$, combine them to express inflation in terms of the output gap.

Accepted Answer

$$\pi - \pi^e = \frac{\alpha}{L}(Y - Y_n)$$

Question 13

If the unemployment rate equals the natural unemployment rate, what is true about output and inflation?

Accepted Answer

Output equals potential output and inflation equals expected inflation

Question 14

Suppose the output gap is positive. According to the output gap equation $$\pi - \pi^e = \frac{\alpha}{L}(Y - Y_n)$$, what happens to inflation?

Accepted Answer

Inflation rises above expected inflation

Question 15

If the central bank responds to higher inflation by raising the policy rate, what is the likely effect on output and inflation in the medium run?

Accepted Answer

Output falls and inflation falls

Question 16

Which of the following best describes stagflation?

Accepted Answer

A period of high inflation and low output

Question 17

If $$L = U + N$$ and $$u = \frac{U}{L}$$, which equation gives the number of employed workers $$N in $$terms of $$u$$ and $$L$$?

Accepted Answer

$$N = L - uL$$

Question 18

In the IS-LM-PC model, what is the effect of a leftward shift of the IS curve?

Accepted Answer

Interest rate falls and output decreases

Question 19

If the unemployment rate is lower than the natural unemployment rate, which of the following is true?

Accepted Answer

Output is above potential and inflation rises

Macroeconomics: IS-LM-PC Model, Output, Unemployment, Inflation, and Oil Price Shocks

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