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Exam 12: Unemployment and Inflation

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Question 21

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The idea that new policies change the economic rules and affect economic behavior,so that no one can safely assume that historical relationships between variables will hold when policies change,is known as

A) Okun's Law.
B) Say's Law.
C) the equation of exchange.
D) the Lucas critique.

E) A) and C)
F) None of the above

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Question 22

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

A) 0) 04.
B) 0) 05.
C) 0) 06.
D) 0) 07.

E) B) and C)
F) A) and D)

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Question 23

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Describe the major costs of inflation,being sure to distinguish between anticipated and unanticipated inflation.

What is the relation between the unemployment rate and the proportion of unemployed workers who have been unemployed for 15 weeks or longer?

Suppose Okun's law holds and a one percentage point increase in the unemployment rate reduces real output by 2% of full-employment output.The expectations-augmented Phillips curve is given by ? = ?e - 2.5 (u - 0.04). Suppose ? = 0.08 and ?e = 0.03. (a)What is the natural rate of unemployment? (b)What is the actual rate of unemployment? (c)How much is actual GDP compared with full-employment GDP?

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

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

Starting on a Phillips curve with expected inflation equal to 5% and unemployment at its natural rate,show what happens to unemployment if the Fed tries to reduce inflation,but has no credibility.As time passes and people realize that the inflation rate is now lower,what happens to the short-run Phillips curve?

Suppose expected inflation in the economy is 5%.Banks set nominal interest rates so they'll earn a 2% expected real return.Employers set nominal wages based on a 2% expected real wage increase.Suppose the nominal interest rate and nominal wages are determined this way,but actual inflation turns out to differ from the expected inflation rate.Calculate the actual real interest rate and the percent increase in the real wage for each of the following actual inflation rates: a)2%; b)5%; c)10%.

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

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

Classicals argue that an adverse supply shock would

Consider the following misperceptions model of the economy. AD: Y = 600 + 10(M/P) SRAS: Y = + P - Pe Okun's Law: (Y - ) / = -2(u - ) Let = 750,= 0.05,M = 600,and Pe = 40. (a)What is the price level? (b)Suppose there is an unanticipated increase in the nominal money supply to 800.What is the short-run equilibrium level of output,the unemployment rate,and the price level? (c)When price expectations adjust fully,what is the price level?

Examining data on cyclical unemployment plotted against unanticipated inflation shows

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

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

Milton Friedman and Edmund Phelps questioned

The relationship between inflation and unemployment is given by ? = ?e - 3(u - 0.06). (a)Graph the long-run Phillips curve and three short-run Phillips curves. (b)What is the value of the natural rate of unemployment? (c)If actual inflation is 0.02 and expected inflation is 0.05,what is the unemployment rate? (d)If actual inflation is 0.08 and expected inflation is 0.05,what is the unemployment rate?

The costs of disinflation would be low if

Keynesians prefer a disinflation policy of