This quiz was first given in 1997 and refers mainly to chapter 14.
  1. The Phillips Curve is


    2. a. star or cross shaped *b. the observed short-run trade-off between unemployment and the rate of inflation
    c. extremely stable in most countries d. a horizontal straight line
     

  2. If people expect what they have just experienced to continue, we say their expectations are


    3. a. rational *b. adaptive c. irrational d. too high
     

  3. If inflation is actually accelerating, adaptive expectations will tend to make people


    4. *a. consistently underestimate inflation b. consistently overestimate inflation c. on average, estimate inflation correctly d. produce unbiased estimates of inflation

    Adaptive expectations imply that you assume what is happening now will also happen next period; if inflation is accelerating, next period it will be faster than this period, but you have assumed it will be the same. So adaptive expectations will mean you consistently underestimate inflation when it is accelerating.
     

  4. If inflation is actually slowing down, rational expectations would result in people


    5. a. consistently underestimating inflation b. consistently overestimating inflation c. on average, estimating inflation correctly over half the time *d. producing unbiased estimates of inflation

    Rational expectations is a jargon phrase; it implies that all information is taken into account, so estimates are unbiased – that is, in effect, the definition.
     

  5. In the long run, most US economists believe that the Phillips Curve is


    6. *a. vertical b. horizontal c. star or cross shaped d. a summary of the possible unemployment/inflation combinations from among which policy makers can choose, accepting more inflation as the cost of less unemployment.

    In the long run, most believe that you cannot force unemployment below the natural rate by accepting a higher RATE of inflation, unemployment forced below the natural rate will result in ACCELERATING inflation, i.e. the long run Phillips Curve is vertical, any rate of inflation is consistent with the natural rate of unemployment.
     

  6. If government and the Fed wanted to reduce an unusually high unemployment rate using discretionary macro policy, would success be more likely if
  1. people expected and understood the consequences of the policy changes involved,
  2. people did not expect or understand the consequences of the policy changes involved, or
  3. it would not make any difference
  4. *some economists would answer a., others b.
Sneaky question in ways; opinions do differ on this. The greater power of unanticipated over anticipated policy changes suggests b., but the rational expectations idea suggests a.
  1. If government and the Fed wanted to reduce an unusually high inflation rate using discretionary macro policy, would success at low cost be more likely if
  1. *people really believed they were going to do it
  2. people did not have faith that the restrictionary policy would be maintained if unemployment increased
  3. it would not make any difference
  4. nobody knows
This is the credibility of policy issue. In the short run, restrictionary monetary/macro policy – what is needed to reduce inflation – is likely to cause more unemployment. If people do not believe that the policy will be maintained in the face of higher unemployment, their expectations will not change, and the reduction in inflation will be slower, and the rise in unemployment larger, than if they do believe policy will remain restrictionary until the inflation is reduced –in which case their expectations do change, and the reduction in inflation is achieved quicker and with less rise in unemployment.
  1. The natural rate of unemployment, the NAIRU (Non-Accelerating Inflation Rate of Unemployment), and the Full Employment unemployment rate
  1. all correspond to zero cyclical unemployment
  2. all may change over time as structural characteristics of the economy change
  3. are three different names for the same concept
  4. *all of the above