Question 1

According to the short-run Phillips curve, what is the relationship between inflation and unemployment when the expected inflation rate and the natural unemployment rate remain constant?

Accepted Answer

There is a negative relationship; as inflation rises, unemployment falls.

Question 2

Okun’s Law states that for each percentage point the unemployment rate is above the natural rate, real GDP is how much below potential GDP?

Accepted Answer

$$2\%$$

Question 3

Suppose the natural unemployment rate is $$5\%$$ and the actual unemployment rate is $$7\%. $$According to Okun’s Law, by what percentage is real GDP below potential GDP?

Accepted Answer

$$4\% ($$since $$2$$ percentage points above natural rate times $$2\%$$ per point)

Question 4

Which of the following best describes the long-run Phillips curve (LRPC)?

Accepted Answer

It is vertical at the natural rate of unemployment, indicating no long-run tradeoff between inflation and unemployment.

Question 5

If the expected inflation rate increases, what happens to the short-run Phillips curve (SRPC)?

Accepted Answer

It shifts upward.

Question 6

A central bank wants to reduce inflation without causing a recession. According to the study materials, which policy is most likely to achieve this outcome?

Accepted Answer

A credible announced inflation reduction, where the policy is communicated in advance.

Question 7

Which of the following statements is consistent with the natural rate hypothesis?

Accepted Answer

Changes in inflation affect unemployment only temporarily; in the long run, unemployment returns to the natural rate.

Question 8

Suppose the Fed unexpectedly raises interest rates to reduce inflation. In the short run, what is the likely effect on unemployment and inflation?

Accepted Answer

Unemployment rises and inflation falls.

Question 9

If people form rational expectations about inflation, what is the likely effect of a credible announced inflation reduction policy?

Accepted Answer

It will lower inflation with little or no increase in unemployment.

Question 10

Which of the following best explains why there is no long-run tradeoff between inflation and unemployment?

Accepted Answer

Because the long-run Phillips curve is vertical at the natural rate of unemployment.

Question 11

A country’s unemployment rate falls below its natural rate for several years due to expansionary monetary policy. According to the natural rate hypothesis, what is the most likely long-run outcome?

Accepted Answer

Inflation expectations will rise, shifting the SRPC upward, and unemployment will return to the natural rate.

Question 12

If the unemployment rate is $$2\%$$ above the natural rate, by what percentage is real GDP below potential GDP according to Okun’s Law?

Accepted Answer

$$4\%$$

Question 13

Which of the following is an example of rational expectations in the context of inflation?

Accepted Answer

People use all relevant data and economic science to forecast inflation.

Question 14

If the expected inflation rate falls, what happens to the short-run Phillips curve?

Accepted Answer

It shifts downward.

Question 15

Suppose the Fed implements a surprise inflation reduction. What is the sequence of events according to the study materials?

Accepted Answer

Aggregate demand slows, unemployment rises, inflation falls, and expected inflation gradually falls.

Question 16

Which of the following would cause a movement along the short-run Phillips curve rather than a shift of the curve?

Accepted Answer

A change in actual inflation with expected inflation held constant.

Question 17

If the natural rate of unemployment increases, what happens to the long-run Phillips curve?

Accepted Answer

It shifts to the right.

Question 18

Which of the following best describes the effect of a credible announced inflation reduction on output and unemployment?

Accepted Answer

Output and unemployment remain unchanged while inflation falls.

Question 19

A policymaker claims that by keeping inflation high, the country can permanently keep unemployment below the natural rate. According to the natural rate hypothesis, is this claim valid?

Accepted Answer

No, because in the long run, unemployment returns to the natural rate regardless of inflation.

Question 20

If the unemployment rate is below the natural rate, what does Okun’s Law predict about real GDP?

Accepted Answer

Real GDP is above potential GDP.

Chapter 15 Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards