Chapter 16

Question 1

1) Compared to other countries, inflation in the United States has been:

Answer 1

A) generally less severe.

Question 2

2) If workers confuse real and nominal magnitudes, they are experiencing:

Answer 2

B) money illusion.

Question 3

Suppose the inflation rate is 4% this year. If nominal wages increase by
4%, real wages will:

Answer 3

D) not change.Real wages are just nominal wages divided by prices.

Question 4

Suppose the inflation rate is 8% this year. If nominal wages increase by
6%, real wages will:

Answer 4

D) decrease by 2%.

Question 5

5) If nominal wages increase by 7% while real wages increase by 3%, the
inflation rate must be:

Answer 5

A) 4%.

Question 6

6) The real rate of interest is defined as the:

Answer 6

C) nominal interest rate minus the expected inflation rate.

Question 7

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:

Answer 7

D) $2.

Question 8

In the long run, increases in the growth rate of the money supply will
__________ nominal rates
of interest and __________ real rates of interest.

Answer 8

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

Question 9

In the short run, increases in the growth rate of the money supply will
__________ nominal rates of interest and __________ real rates of
interest.

Answer 9

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.

Question 10

11) The expectations Phillips curve describes the relationship between
inflation and unemployment:

Answer 10

D) when expectations of inflation are taken into account.

Question 11

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:

Answer 11

B) increases. Hence the negatively sloped Phillips curve

Question 12

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:

Answer 12

real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise.

Question 13

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:

Answer 13

real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise.

Question 14

A nation that cannot borrow money but creates a large budget deficit is
likely to experience:

Answer 14

hyperinflation

Question 15

Monetarists:

Answer 15

emphasize the role of money in the economy.

Question 16

Suppose workers negotiate for a 5% nominal wage increase and expect a 4%
inflation rate. If the actual inflation rate is 7%, then workers:

Answer 16

are worse off and firms are better off

Question 17

As the result of unanticipated inflation, workers are better off while
firms are worse off if the actual inflation rate:

Answer 17

is less than the expected inflation rate.

Question 18

As the result of unanticipated inflation, borrowers are better off while
lenders are worse off if the actual inflation rate:

Answer 18

exceeds the expected inflation rate.

Question 19

Suppose that the expected inflation rate is 5.5% and the actual
inflation rate is 3%. Then borrowers:

Answer 19

are worse off and lenders are better off.