CB2402 Macroeconomics

Self-study Exercise - Week 10

Chapter 28 Inflation, Unemployment, and Federal Reserve Policy

1) An increase in frictional unemployment will

A) shift the long-run Phillips curve to the right.
B) increase the natural rate of unemployment.
C) shift the short-run Phillips curve to the right.
D) All of the above are correct.
E) None of the above is correct.

Figure 28-1

2) Refer to Figure 28-1. Suppose that the economy is currently at point A, and the
unemployment rate at A is the natural rate. What policy would the Federal Reserve
pursue if it wanted the economy to move to point B in the long run?
A) Buy treasury bills.
B) Sell treasury bills.
C) Raise the discount rate.
D) Decrease the money supply.
E) No policy from the above will move the economy to point B in the long run.
3) If the long-run aggregate supply curve is vertical
A) the economy stays at the natural rate of inflation in the long run.
B) the short-run Phillips curve must be vertical.
C) unemployment and inflation are positively related in the long run.
D) the trade-off between unemployment and inflation cannot be permanent.

4) If workers and firms lower their inflation expectations

A) unemployment will rise.
B) actual inflation will fall to match expected inflation.
C) the short-run Phillips curve will be vertical.
D) the short-run Phillips curve will shift downward.

Figure 28-4

5) Refer to Figure 28-4. Consider the shift in the short-run Phillips curves shown in
the above graph. This shift may be explained by
A) an increase in the natural rate of unemployment from 5.0 to 6.2 percent.
B) an increase in the expected rate of inflation from 4.0 to 5.5 percent.
C) either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an
increase in the expected rate of inflation from 4.0 to 5.5 percent.
D) None of the above is correct.
6) Monetary policy can
A) shift the short-run trade-off between inflation and unemployment if it affects
expected inflation.
B) shift the long-run trade-off between inflation and unemployment through changes
in cyclical unemployment.
C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation
and unemployment.
D) shift both the short-run and long-run trade-offs between inflation and
unemployment if changes in policy are credible.

7) With which of the following statements would a "real business cycle" theorist most
closely agree?
A) "Monetary policies have greatest impact on real GDP when they are anticipated."
B) "Expansionary monetary policy allows the central bank to control inflation and
unemployment simultaneously."
C) "Wages adjust slowly to changes in inflation as long as expectations are formed
rationally."
D) "Technological shocks to the economy explain deviations of real GDP from its
potential level."

8) According to the "rational expectations" school of thought in macroeconomics, the

short-run Phillips curve is ________ in face of unanticipated changes in monetary
policy.
A) negatively sloped
B) positively sloped
C) vertical
D) horizontal

9) If the current unemployment rate is 5%, under which of the following

circumstances would you expect the Fed to use expansionary monetary policy?
A) if the natural rate of unemployment is below 5%
B) if the natural rate of unemployment is above 5%
C) if the inflation rate is above 5%
D) if the inflation rate is below 5%
Figure 28-9

10) Refer to Figure 28-9. A supply shock, such as rising oil prices, would be depicted
as a movement from
A) A to D to C.
B) C to B to A.
C) C to D to A.
D) C to E to B.
E) A to B to C.
Answer to Self-study Exercise – Week 10

MCQ Answer

1 D

2 E

3 D

4 D

5 B

6 A

7 D

8 A

9 A

10 A