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Table of Contents

  1. Chapter Twenty-Four: Inflation

Chapter Twenty-Four: Inflation

1
Question 1

Which of the following is not a reason why unexpected inflation is generally considered to be undesirable?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) Because wages tend to catch up with prices.Your answer has been saved.
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2
Question 2

Monetary accommodation of a one-off supply shock implies that:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) The monetary authority reacts to a negative supply shock by loosening policy in order to ensure that GDP returns to its potential level, and accepts a one-off increase in the price level.Your answer has been saved.
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3
Question 3

Which of the following is a correct statement about monetary accommodation in the context of potentially repeated supply shocks?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) Accommodation of a negative supply shock risks setting off a wage-price spiral, but accommodating the first-round effects of shocks may limit the output and employment losses that are otherwise inevitable.Your answer has been saved.
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4
Question 4

Monetary validation of demand shocks refers to:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) A relaxation of monetary policy in response to a positive demand shock.Your answer has been saved.
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5
Question 5

The NAIRU is:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) The level of unemployment that corresponds with GDP being at its potential level.Your answer has been saved.
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6
Question 6

Which of the following is a correct statement about the trade-off between inflation and unemployment?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) There is a short-run but not a long-run trade-off between inflation and unemployment.Your answer has been saved.
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7
Question 7

A short-run Phillips curve shows:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) The rate of money-wage inflation for each level of possible unemployment and for a specific expected inflation rate.Your answer has been saved.
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8
Question 8

The long-run Phillips curve shows:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) The level of unemployment at which expectations of and the actual outcome for inflation will be the same.Your answer has been saved.
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9
Question 9

The non-linearity of the short-run Phillips curve is a result of the fact that:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) Wages, and hence prices, rise rapidly in the face of an inflationary gap, but fall only slowly in the face of a recessionary gap.Your answer has been saved.
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10
Question 10

The Lucas aggregate supply curve implies that:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) The SRAS curve is positively sloped in response to an unexpected demand shock.Your answer has been saved.
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11
Question 11

To what extent is inflation a purely monetary phenomenon?

Hint: re-read 'Inflation as a monetary phenomenon', pp550-52. Hint

12
Question 12

What conditions can lead to the emergence of hyperinflation?

Hint: re-read 'Box 24.1: Hyperinflation', pp552. In considering this question, you may also want to outline what a government must do in order to bring hyperinflation under control'. Hint

13
Question 13

Why do you think that the empirical relationship between unemployment and inflation embodied in the Phillips curve was highly attractive to policymakers in the 1960s?

Hint: re-read 'The theory of the Phillips curve', pp554-55. You may wish to put yourself in the mind-set of politicians who had witnessed the slump conditions that characterised the lives of many people during the 1930s. Hint

14
Question 14

What factors contribute to the curvilinear slope of the Phillips curve?

Hint: re-read 'The shape of the Phillips curve', pp554. If you have forgotten the basic shape of the Phillips curve, you may wish to refresh your memory by looking at Figure 24.6 (p554). Consider why, in particular, its slope gets flatter at increasingly high levels of unemployment.Hint

15
Question 15

What factors might economic agents use to formulate their expectations about future economic conditions?

Hint: re-read 'Expectational forces', pp557-58. In composing your answer, you should consider how past and present economic conditions might be weighted by economic agents. Consider also the policy-making implications of expectations formation. Hint

16
Question 16

How does an expectations-augmented Phillips curve differ from the original inflation-unemployment relationship?

Hint: re-read 'The expectations-augmented Phillips curve', p559.Hint

17
Question 17

Why assumptions result in the long-run Phillips curve assuming a vertical line?

Hint: re-read 'The long-run Phillips curve', pp559-60. Hint

18
Question 18

To what extent is the assumption of rational expectations a central feature of the Lucas aggregate supply curve?

Hint: re-read 'The Lucas aggregate supply function', pp560-63. Hint

19
Question 19

Why were prices volatile during the years of the Gold Standard?

Hint: re-read 'Case Study 1: Inflation and the price level in the long-run', pp563-64. In answering this question, try to include the term 'mean reversion of prices'. Hint

20
Question 20

Should asset prices be included in the setting of future inflation targets?

Hint: re-read 'Case Study 2: Asset price bubbles', pp564-65. In setting out your answer, you may wish to consider the degree to which a meaningful measure of asset prices could be established. For example, to what extent should company shares and houses be seen as different types of asset? Hint