16.4

Question 1

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the long run we would expect

a higher real rate of interest.

no change in the real rate of interest.

a decline in unemployment.

lower real interest rates.

a decline in potential GDP.

Answer 1

no change in the real rate of interest.

Question 2

The AD-AI analysis in conjunction with the Phillips curve relationship shows that

inflation and unemployment are positively correlated in the long run.

it is impossible to trade higher inflation for lower unemployment in the short run.

there is no long-run gain from expansionary monetary policy.

there is no short-run gain from expansionary monetary policy.

it is possible to trade lower inflation for higher unemployment in the long run.

Answer 2

there is no long-run gain from expansionary monetary policy.

Question 3

The Phillips curve reflects a positive relationship between inflation and unemployment.

true
false

Answer 3

false

Question 4

If prices and wages are perfectly flexible, there is never any tradeoff between inflation and unemployment.

true
false

Answer 4

true

Question 5

The main rationale for central bank independence is that

in counties like the United States, this independence helps reduce the conflict between state and federal government.

this independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run.

if the central bank were not independent, the government would be too bureaucratic.

without this independence, it would be hard to attract competent people to work for the central bank.

All of the above are correct.

Answer 5

this independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run.