4. In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different effects on the magnitude and duration of unemployment in these two economies?
10. Due to historical differences, countries often differ in how quickly a change in actual inflation is incorporated into a change in expected inflation. In a country such as Japan that
has had very little inflation in recent memory, it will take longer for a change in the actual inflation rate to be reflected in a corresponding change in the expected inflation rate. In
contrast, in a country such as Argentina, one that has recently had very high inflation, a change in the actual inflation rate will immediately be reflected in a corresponding change in the
expected inflation rate. What does this imply about the short run and long-run Phillips curves in these two types of countries? What does this imply about the effectiveness of monetary and fiscal policy to reduce the unemployment rate?
5. Concerned about the crowding-out effects of government borrowing on private investment spending, a candidate for president argues that the United States should just print
money to cover the government's budget deficit. What are the advantages and disadvantages of such a plan?
6. Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%,
reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next year.
a. If the inflation rate is actually 4% over the next year, how does that lower-than-expected inflation rate affect Boris and Lynn? Who is better off?
b. If the actual inflation rate is 7% over the next year, how does that affect Boris and Lynn? Who is better off?
4. In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two
years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different effects on the magnitude and duration of unemployment in these two economies?
The effect on the two economies depends on how quickly wages can react to the change in aggregate output. When output declines, employers have less need for workers. Firms will want to hire fewer people, or lower wages.
In Northlandia the labor market will quickly adjust to the change in output. Firms will lower wages and the market will reach equilibrium again, making unemployment of less duration there. In Southlandia, employers will have to lay people off since they can't cut their wages. The magnitude and duration of unemployment will be greater there until the new contracts are negotiated.
5. Due to historical differences, countries often differ in how quickly a change in ...
How inflation affects interest rates and labor contracts affect unemployment.
1. If the price level for the last three months has been 112, 125, and 126, we would say:
a. inflation has been constant over the three months.
b. inflation was more rapid between the first and second month than between the second and third month.
c. inflation was less rapid between the second month than between the second and third month.
d. inflation has steadily increased over the three months.
2. Suppose that the price level was 100 in 2001, 110 in 2002, 120 in 2003, and 130 in 2004. Over these three years,
a. the inflation rate accelerated.
b. inflation did not occur.
c. prices were stable.
d. the inflation rate was positive.
3. Which of the following is a change that would not begin a demand-pull inflation?
a. An increase in exports.
b. An increase in labor productivity.
c. An increase in government purchases of goods and services.
d. An increase in the quantity of money.
4. Because anticipated inflation raises the nominal interest rate, it thereby increases the dollars paid as interest, so the after-tax real interest rate
c. is not affected.
d. may rise or fall depending on the amount of inflation.
5. Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the inflation rate turns out to be 8 percent instead,
a. there is a movement upward along the curve.
b. there is a movement downward along the curve.
c. there is a downward shift of the curve.
d. the difference in the inflation rate does not affect the Phillips curve.
6. Which of the following statements about the long-run Phillips curve is correct?
a. The long-run Phillips curve is horizontal.
b. The long-run Phillips curve shifts leftward of the natural rate of unemployment decreases.
c. The long-run Phillips curve shifts rightward and upward if the expected inflation rate increases.
d. None of the above statement is correct.
7. When the inflation rate is positive, the
a. real interest rate is greater than the normal interest rate.
b. real interest rate is less than the nominal interest rate.
c. nominal interest rate is zero.
d. real interest rate equals the nominal interest rate.
8. Cost-push inflation might start with
a. a rise in money wage rates.
b. an increase in government purchases.
c. an increase in the quantity of money.
d. a fall in the prices of raw materials.
9. Suppose that, initially, the nominal interest rate is 6 percent and the expected inflation rate is 3 percent. If the expected inflation rate increases to 6 percent, what will be the new nominal interest rate?
a. 6 percent
b. 1 percent
c. 11 percent
d. 9 percent
10. In the Keynesian model of aggregate expenditure, real GDP is determined by the
a. price level.
b. level of aggregate demand.
c. level of aggregate supply.
d. level of taxes.
11. If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, the multiplier is
12. Disposable income is $6 billion and planned savings is $2 billion. What is the value of planned consumption expenditure?
a. $8 billion
d. $4 billion
13. Critics of the real business cycle model argue that
a. investment spending is strongly related to the real interest rate.
b. labor supply is only weakly related to the real interest rate.
c. investment spending is only weakly related to the real interest rate.
d. labor supply is very strongly related to the real interest rate.
14. During the Great Depression, the unemployment rate
a. remained low as wages fell.
b. climbed to 10 percent.
c. climbed to 25 percent.
d. remained stable but asset prices fell.
15. According to monetarists such as Milton Friedman, the Great Depression was the result of
a. the stock market crash of 1929
b. a massive contraction of the quantity of money, leading to large decreases in aggregate demand.
c. an expansion of the quantity of money, leading to higher inflation.
d. loss of business and consumer confidence.
16. In real business cycle theory, all of the following events can be sources of fluctuation in productivity except ___________.
a. the pace of technological change
b. climate fluctuations
c. the growth rate of money
d. natural disasters
17. In real business cycle theory, the unemployment rate ________ the natural rate in an expansion and _________ the natural rate in a recession.
a. is equal to; rises above
b. falls below; is equal to
c. falls below; rises above
d. is equal to; is equal to
18. If the government's expenditures are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget
a. surplus of $0.7 trillion.
b. surplus of $3.7 trillion.
c. deficit of $0.7 trillion.
d. deficit of $3.7 trillion.
19. A structural deficit occurs when the government budget has a deficit
a. even though real GDP is less than potential GDP.
b. even though real GDP is greater than structural GDP.
c. even though real GDP is equal to potential GDP.
d. that is nominal, as opposed to real budget deficit.
20. When tax revenues exceed expenditures, the government has a __________, and when expenditures exceed tax revenues, the government has a ___________.
a. budget surplus; budget debt
b. budget deficit; budget surplus
c. budget debt; budget surplus
d. budget surplus; budget deficit
21. Contractionary fiscal policy _________ aggregate demand and in the short run _____ real GDP.
a. decreases; decreases
b. increases; increases
c. decrease; increases
d. increases; decreases
22. When a government has a budget surplus,
a. it helps finance investment.
b. it crowds-out private saving.
c. it must be subtracted from private saving.
d. it increase the world real interest rate.
23. The Ricardo-Barro effects asserts that government
a. saving affects private saving.
b. budget deficits crowd out private borrowing.
c. spending affects private spending.
d. taxation raises interest rates.
24. If workers and employers base their wages on an inflation forecast that turns out to be correct,
a. workers gain at the expense of employers.
b. employers gain at the expense of workers.
c. both workers and employers lose from the inflation.
d. neither workers nor employers gain or lose from the inflation.
25. Which of the following statement is correct?
a. Actual aggregate expenditures does not always equal real GDP.
b. Planned investment exceeds actual investment when real GDP is greater than aggregate planned expenditures.
c. Actual investment exceeds planned investment when real GDP is less than aggregate planned expenditures.
d. None of the above are correct.