Question 1

Which of the following best describes the short-run Phillips curve?

Accepted Answer

A curve showing the short-run relationship between the unemployment rate and the inflation rate.

Question 2

According to the Phillips curve, what typically happens when the Federal Reserve pursues expansionary monetary policy in the short run?

Accepted Answer

Unemployment decreases and inflation increases.

Question 3

Why is the long-run Phillips curve vertical?

Accepted Answer

Because in the long run, unemployment is determined by the natural rate and is independent of the inflation rate.

Question 4

Suppose workers and firms expect a 5% inflation rate, but actual inflation turns out to be 2%. What is the likely effect on real wages and employment?

Accepted Answer

Real wages will rise and employment will fall.

Question 5

Which of the following equations best represents the relationship between the expected inflation rate ($$\pi^e$$), actual inflation rate ($$\pi$$), and the natural rate of unemployment ($$u_n) in $$the long run?

Accepted Answer

$$\pi = \pi^e$$ when unemployment is at $$u_n$$

Question 6

What is the main implication of rational expectations for the effectiveness of monetary policy?

Accepted Answer

If workers and firms have rational expectations, anticipated monetary policy will not affect real output or unemployment.

Question 7

Which of the following scenarios would cause the short-run Phillips curve to shift upward?

Accepted Answer

A supply shock that increases oil prices.

Question 8

What is the non-accelerating inflation rate of unemployment (NAIRU)?

Accepted Answer

The unemployment rate at which inflation is constant.

Question 9

If the Federal Reserve wants to permanently lower the inflation rate, what must it do according to the Phillips curve framework?

Accepted Answer

Announce and maintain a contractionary monetary policy until expectations adjust downward.

Question 10

Which of the following best explains why the Fed’s credibility is important for controlling inflation?

Accepted Answer

If the Fed is credible, people will quickly adjust their inflation expectations when the Fed announces a new policy.

Question 11

Which of the following is a likely consequence of the Fed keeping the federal funds rate too low for an extended period, as happened in the early 2000s?

Accepted Answer

It can encourage excessive borrowing and contribute to asset bubbles.

Question 12

Which of the following is NOT a reason the natural rate of unemployment might change?

Accepted Answer

A temporary increase in inflation.

Question 13

What is the main argument of real business cycle models?

Accepted Answer

Fluctuations in real GDP are primarily caused by real factors such as technology shocks.

Question 14

Which of the following best describes the effect of an unanticipated increase in inflation on the labor market in the short run?

Accepted Answer

Real wages fall, leading firms to hire more workers and unemployment to decrease.

Question 15

Suppose the Fed adopts a too-big-to-fail policy. What is a potential unintended consequence of this policy?

Accepted Answer

It may encourage financial firms to take excessive risks, knowing they will be bailed out.

Question 16

Which of the following policy proposals would most likely reduce the independence of the Federal Reserve?

Accepted Answer

Increasing congressional oversight and auditing the Fed’s monetary policy actions.

Question 17

If the short-run Phillips curve is vertical, which of the following must be true?

Accepted Answer

Workers and firms have rational expectations and wages and prices adjust instantly.

Question 18

Which of the following best describes 'forward guidance' as used by the Federal Reserve?

Accepted Answer

Announcing future monetary policy intentions to influence expectations and long-term interest rates.

Question 19

Which of the following is supported by the findings of Alesina and Summers regarding central bank independence?

Accepted Answer

Countries with more independent central banks tend to have lower inflation rates.

Inflation, Unemployment, and Federal Reserve Policy: Study Notes

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