Inflation Rate – Principles of Macroeconomics Homework

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Inflation Rate, Money Supply, Phillips Curve, Principles of Macroeconomics Homework

The key words in this Macroeconomics course include Inflation Rate, Money Supply, Short-run Phillips Curve, Price Level, Bonds, Higher Output, Lower Employment,


Suppose that inflation is trending upward. The actual inflation rate for three periods is 0%, then 4%, and then 8%. Based on this statement, which of the following is true?

If someone is predicting rationally, the inflation rate in the fourth period will be 8%

If someone is using adaptive expectations, the inflation rate in the fourth period will be 12%

If someone is predicting rationally, the inflation rate in the fourth period will be 16%

If someone is using adaptive expectations, the inflation rate in the fourth period will be 8%

Explanation : Expectations formed rationally recognize the trend and, looking to the future, predict 12%.
This outcome is different from what would occur under adaptive expectations, which would instead imply an expectation of 8% in the fourth period, since that number is consistent with the most recent experience.


The more bonds the Fed sells, the __ the money supply grows, and the__ the inflation rate will be.

faster; higher

slower; higher

faster; lower

slower; lower

Explanation : When the Fed sells bonds to financial institutions through open market operations, the amount of money in the loanable funds market will decrease. This lowers the funds that banks can use to make loans, therefore decreasing the money supply. A decrease in the price level will accompany the decrease in the money supply.


The short-run Phillips curve is ________________ and the long-run Phillips curve is ________________.

downward sloping; horizontal

upward sloping; vertical

upward sloping; horizontal

downward sloping; vertical

Explanation : In the short run, there is a potential trade-off between inflation and unemployment. As inflation rises, unemployment falls, and vice-versa. Thus, the short-run Phillips curve is downward sloping.

In the long run, monetary policy is neutral. In other words, it does not impact real variables like unemployment. Thus, if you increase the money supply, it will increase the price level, but it will have no impact on unemployment. Therefore, the long-run Phillips Curve is vertical at the natural rate of output (u*).

The graph below shows both curves.


Which of the following describes the expected outcome of expansionary monetary policy in the short run?

higher employment, higher output, and a higher price level

higher employment, higher output, and a lower price level

lower employment, higher output, and a higher price level

lower employment, lower output, and a lower price level

Explanation : The actions of the central bank to increase the money supply should cause an increase in the aggregate demand curve. By shifting this curve in the aggregate demand–aggregate supply graph, a new short run equilibrium will result. This causes real GDP, or total output, to increase. To accomplish this, more workers are employed, resulting in higher employment levels. Comparing the old price level to the new price level will also reveal that the price level has risen.