Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 31, Problem 6MCQ
To determine
To explain:
The fed's action when the
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Assuming prices and output are somewhat flexible, an increase in consumer spending will cause inflation to __________ in the short run and growth to ___________ in the short run.
increase/decrease
increase/increase
decrease/increase
decrease/decrease
uncertain/decrease
Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 5%.
Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply.
Time Period
Before increase in MS
Immediately after increase
in MS
Nominal Interest
Rate
(Percent)
12
12
Expected
Inflation
(Percent)
5
5
The unanticipated change in inflation arbitrarily benefits
Actual
Inflation
(Percent)
5
10
Expected Real Interest
Rate
(Percent)
Actual Real Interest
Rate
(Percent)
Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 10% per
year.
Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in
the money supply (MS).
Now consider the long-run impact of the change in money growth and inflation. According to…
The graph depicts a hypothetical economy's short-run Philips
curve (SRPC). Please shift the SRPC to reflect what happens
when expected inflation decreases by 2 percentage points.
After the shift in SRPC, what is the unemployment rate if the
public expects no inflation in the economy?
%
Inflation rate (%)
-1
-2
0
7
6
SRPC
5
4
3
2
-3
0
1
2
3
4
5
6
7
8
0
10
Chapter 31 Solutions
Foundations of Economics (8th Edition)
Ch. 31 - Prob. 1SPPACh. 31 - Prob. 2SPPACh. 31 - Prob. 3SPPACh. 31 - Prob. 4SPPACh. 31 - Prob. 5SPPACh. 31 - Prob. 6SPPACh. 31 - Prob. 7SPPACh. 31 - Prob. 8SPPACh. 31 - Prob. 9SPPACh. 31 - Prob. 10SPPA
Ch. 31 - Prob. 11SPPACh. 31 - Prob. 1IAPACh. 31 - Prob. 2IAPACh. 31 - Prob. 3IAPACh. 31 - Prob. 4IAPACh. 31 - Prob. 5IAPACh. 31 - Prob. 6IAPACh. 31 - Prob. 7IAPACh. 31 - Prob. 8IAPACh. 31 - Prob. 9IAPACh. 31 - Prob. 10IAPACh. 31 - Prob. 1MCQCh. 31 - Prob. 2MCQCh. 31 - Prob. 3MCQCh. 31 - Prob. 4MCQCh. 31 - Prob. 5MCQCh. 31 - Prob. 6MCQ
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- Suppose the nominal interest rate on car loans is 13% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 13 13 Expected Inflation (Percent) 4 4 The unanticipated change in inflation arbitrarily benefits Actual Inflation (Percent) 4 6 Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). Now consider the long-run impact of the change in money growth and inflation. According to the Fisher…arrow_forwardAssuming prices are sticky in the short run, a decrease in useful government spending will cause inflation to __________ in the short run and growth to ___________ in the short run. remain unchanged/decrease increase/increase decrease/increase decrease/decrease remain unchanged/remain unchangedarrow_forwardAt full employment, the expected inflation rate is ... A. higher than the inflation rate B. equal to the inflation rate C. lower than the inflation rate D. unknown E. unrelated to the inflation ratearrow_forward
- Assuming prices and output are somewhat flexible, an increase in worthless government spending will cause inflation to __________ in the short run and growth to ___________ in the short run. increase/decrease increase/increase decrease/increase decrease/decrease remain unchanged/remain unchangedarrow_forwardIf natural unemployment rate is 5%, nominal interest rate is 7%, inflation is constant at 3%. The central bank adopts an expansionary monetary policy to reduce unemployment rate to 3%. According to EAPC with adaptive inflation, if the inflation rises to 6%, the likely long run outcome of this policy would be a. Real interest rate 3%, natural unemployment rate 3% b. Nominal interest rate 10%, natural unemployment rate 5% c. Nominal interest rate 9%, natural unemployment rate 3% d. Real interest rate 1%, natural unemployment rate 5%arrow_forwardWhich of the following situations would lead to actual inflation of 3%? A. future inflation is 1%; output-gap inflation is 0%; supply-shock inflation is 2% B. future inflation is 3%; output-gap inflation is 3%; supply-shock inflation is 3% C. future inflation is 1.5%; output-gap inflation is 1.5%; supply-shock inflation is 3% D. future inflation is 0%; output-gap inflation is 3%; supply-shock inflation is - 3% E. future inflation is 3%; output-gap inflation is 0%; supply-shock inflation is - 3%arrow_forward
- Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Nominal Interest Expected Actual Expected Real Interest Actual Real Interest Rate Inflation Inflation Rate Rate Time Period (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 11 4 Immediately after increase 11 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily benefits Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as…arrow_forwardIn the short-run you know that firms and households expect inflation of 3.6% next year. There are no supply shocks and cyclical unemployment is 1.09%. Lambda is 0.5. With this information, what is the inflation rate today? Write your answer as a percentage, round at one (1) decimal, and do not write the percentage sign. Use a minus sign if needed.arrow_forwardIn this Decision Point you learned a little about inflation and inflation expectations. Apply what you learned from this decision point to the following questions. Erica makes $25 per hour. Erica receives a 1.9%1.9% raise and inflation is 2.5%2.5% what happens to her real wage? Her real wage: rises by 1.9%1.9% rises by 2.5%2.5% falls by 0.6%0.6%. does not change.arrow_forward
- b. Suppose a country has a money demand function (M/P)d= kỲ, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?arrow_forward1. The inflation-unemployment relationship The following graph shows the combinations of unemployment and inflation that existed in the United States for selected years between 1961 and 1969. Click on any blue point (circle symbol) on the graph to get its exact coordinates. You can also use the black point (cross symbol) to find the coordinates of other points along the curve. (Note: You will not be graded for any adjustments made to the graph.) NFLATION RATE (Percent) 5.0 4.5 4.0 3.5 3.0 2.5 20 1.5 1.0 0.5 0 3.0 3.5 1969 1968 1967 1965 4.0 1964 4.5 6.0 UNEMPLOYMENT RATE (Percent) 5.0 5.5 1963 6.5 1961 7.0 ?arrow_forwardgiven the graph and The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Suppose that investment spending by business firms increases causing the AD function to shift to the right by 3,000 units. what will the inflation rate be? what will short run real gdp be? what will cyclical unemployment be? what will overall unemployment be? what will the long term inflation rate be?arrow_forward
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