Chapter 16 Flashcards
1) Compared to other countries, inflation in the United States has been:
A) generally less severe.
2) If workers confuse real and nominal magnitudes, they are experiencing:
B) money illusion.
Suppose the inflation rate is 4% this year. If nominal wages increase by
4%, real wages will:
D) not change.Real wages are just nominal wages divided by prices.
Suppose the inflation rate is 8% this year. If nominal wages increase by
6%, real wages will:
D) decrease by 2%.
5) If nominal wages increase by 7% while real wages increase by 3%, the
inflation rate must be:
A) 4%.
6) The real rate of interest is defined as the:
C) nominal interest rate minus the expected inflation rate.
Suppose you have $100 to invest for a year and the nominal interest rate
is 5%. If the inflation
rate during the year is 3%, at the end of the year your real gain from
the investment is:
D) $2.
In the long run, increases in the growth rate of the money supply will
__________ nominal rates
of interest and __________ real rates of interest.
C) increase; not affect. Money is neutral in the long run. Thus, no long-run effect on real interest rates, but increases in the
growth rate of money lead to higher inflation and expected inflation, which implies higher nominal interest rates in the long run
In the short run, increases in the growth rate of the money supply will
__________ nominal rates of interest and __________ real rates of
interest.
C) decrease; decrease. In the short run, increases in the money supply will decrease both nominal and real interest rates
(recall the graph of money supply and money demand, with money supply shifting to the right), as money
has no effect on prices in the short run.
11) The expectations Phillips curve describes the relationship between
inflation and unemployment:
D) when expectations of inflation are taken into account.
Assume that last year’s inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases, the unemployment rate:
B) increases. Hence the negatively sloped Phillips curve
Suppose the economy has been at full employment for the past two years
with a 5% inflation rate. If the Federal Reserve unexpectedly increases
the rate of money growth to 7%, the following sequence of events occurs:
real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise.
Suppose the economy has been at full employment for the past two years
with a 4% inflation rate. If the Federal Reserve unexpectedly increases
the rate of money growth to 6%, the following sequence of events occurs:
real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise.
A nation that cannot borrow money but creates a large budget deficit is
likely to experience:
hyperinflation
Monetarists:
emphasize the role of money in the economy.
Suppose workers negotiate for a 5% nominal wage increase and expect a 4%
inflation rate. If the actual inflation rate is 7%, then workers:
are worse off and firms are better off
As the result of unanticipated inflation, workers are better off while
firms are worse off if the actual inflation rate:
is less than the expected inflation rate.
As the result of unanticipated inflation, borrowers are better off while
lenders are worse off if the actual inflation rate:
exceeds the expected inflation rate.
Suppose that the expected inflation rate is 5.5% and the actual
inflation rate is 3%. Then borrowers:
are worse off and lenders are better off.
