topics 5 & 6

Question 1

What assumption is used when predicting the inflation rate?

Answer 1

It will be the same as the previous year

This is known as adaptive inflation expectations.

Question 2

What occurs when actual inflation equals the expected inflation rate?

Answer 2

The natural rate of unemployment

This indicates that the economy is at equilibrium.

Question 3

How can the Phillips Curve (PC) be expressed in terms of output?

Answer 3

Using the definitions of unemployment and the production function

Question 4

What type of relationship does the Phillips Curve show when derived in terms of unemployment?

Answer 4

A negative relationship

The PC is downward sloping.

Question 5

What happens when the change in inflation equals zero on the Phillips Curve?

Answer 5

PC crosses U at Un, the natural rate of unemployment

Question 6

What does low unemployment below the natural rate indicate on the Phillips Curve?

Answer 6

A move up the PC and a positive change in inflation

Question 7

What does the equilibrium point WS=PS represent in the IS-LM-PC model?

Answer 7

The potential output for an economy

Question 8

What does a negative output gap indicate in the IS-LM framework?

Answer 8

Actual output is below the natural output (Yn)

Question 9

What is one government policy to address low output?

Answer 9

Tax cuts, increased consumption, and increased output

Question 10

What can lead to accelerating inflation according to the document?

Answer 10

High worker bargaining power and increased consumer demand

Question 11

What impact does monetary policy have on the LM curve?

Answer 11

It can shift the LM curve upwards

Question 12

What was a significant cause of stagflation in the 1970s?

Answer 12

The oil price crisis and cost-push inflation

Question 13

What did the adaptive inflation expectations during the 1970s lead to?

Answer 13

A higher real price of oil than its actual price in dollars

Question 14

What was one consequence of increasing the fed rate during Volcker’s tenure?

Answer 14

Triggered high unemployment

Question 15

What is the difference between anchored and adaptive inflation expectations?

Answer 15

Anchored is centrally controlled; adaptive is based on previous rates

Question 16

What happens to inflation during demand shocks under anchored expectations?

Answer 16

Inflation rises above the target but stabilizes rather than accelerating

Question 17

What caused the oil price shock in the 2000s?

Answer 17

China joining the WTO and the commodity price boom

Question 18

What was the impact of the Great Depression on US real GDP?

Answer 18

Fell 30% between 1929 and 1933

Question 19

What initial policy response worsened the Great Depression?

Answer 19

Increasing taxes to reduce government deficit

Question 20

What helped halt the Great Depression?

Answer 20

FDR’s New Deal

Question 21

What was a result of the New Deal in the context of the economy?

Answer 21

Increased government deficit and reduced risk premium

Question 22

What does a rise in the mark-up cause in the Phillips Curve?

Answer 22

A fall in the natural rate of output (Yn)

Question 23

What caused the 1970s stagflation?

Answer 23

OPEC embargo + Iranian Revolution → oil supply fell

This led to a significant decrease in oil supply, contributing to economic instability.

Question 24

What was the effect of the oil price increase during the 1970s stagflation?

Answer 24

Real oil price ↑ 5×, cost-push inflation

This resulted in a reduction of the production supply curve.

Question 25

What happened to the PS curve during the 1970s stagflation?

Answer 25

PS curve shifts ↓ → Y_n falls → PC shifts left ## Footnote This indicates a decrease in the potential output due to rising costs.

Question 26

What was the result of the 1970s stagflation?

Answer 26

Inflation + stagnation = stagflation ## Footnote This refers to the combination of rising inflation and stagnant economic growth.

Question 27

What was the central bank's response to the stagflation in the 1970s?

Answer 27

Weak central bank response worsened situation ## Footnote The ineffective monetary policy contributed to the persistence of stagflation.

Question 28

What action did the Fed take during the Volcker Disinflation?

Answer 28

Fed raised interest rates sharply → LM shifts ↑ ## Footnote This was aimed at controlling inflation but had severe economic consequences.

Question 29

What was the outcome of the Volcker Disinflation?

Answer 29

Harsh but effective inflation control ## Footnote This method successfully reduced inflation but led to a recession.

Question 30

How did inflation expectations differ between the 1970s and 2000s?

Answer 30

1970s: Adaptive; 2000s: Anchored ## Footnote Adaptive expectations are based on past experiences, while anchored expectations are influenced by central bank targets.

Question 31

What was the effect of the 2000s Oil Shock on inflation?

Answer 31

Inflation rose briefly, but did not accelerate ## Footnote The anchored expectations helped stabilize inflation despite rising oil prices.

Question 32

What was the primary shock during the Great Depression?

Answer 32

Demand-Side Shock ## Footnote This refers to the significant decrease in demand leading to economic collapse.

Question 33

What was a key effect of FDR's New Deal?

Answer 33

Expansionary fiscal stimulus: Government spending ↑ → IS shifts right ## Footnote This policy aimed to stimulate economic recovery.

Question 34

What was the outcome of FDR's New Deal?

Answer 34

Output rises toward new Y_n; Inflation moves from deflation to positive territory ## Footnote This helped to end the deflationary spiral and promote economic growth.

Question 35

True or False: The Great Depression saw a significant increase in bank failures, with approximately 50% failing.

Answer 35

True ## Footnote This highlights the banking crisis that occurred during the Great Depression.