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16. >>. Inflation, Disinflation, and Deflation. Krugman/Wells. CHECK YOUR UNDERSTANDING. Check Your Understanding 16-1 Questions 1 and 2.

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16

>>

Inflation, Disinflation, and Deflation

Krugman/Wells

CHECK YOUR UNDERSTANDING



1) Suppose there is a large increase in the money supply in an economy that previously had low inflation. As a consequence, output expands in the short run. Does this disprove the classical model?

  • Yes

  • No


2) Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?

  • yes

  • no


Check Your Understanding 16-2 indexed to inflation. Can there still be an inflation tax?Question 1*


1*) Use Okun’s Law to predict the unemployment rate when the natural rate of unemployment is 5.2% and the output gap is -10%.

  • 10.2%

  • 4.8%

  • -4.8%

  • 0


Check Your Understanding 16-2 the natural rate of unemployment is 5.2% and the output gap is -10%.Questions 1 and 2


1) The short-run Phillips curve illustrates the negative relationship between cyclical unemployment and the actual inflation rate for a given level of the expected inflation rate.

  • True

  • False



Check your understanding 16 3 questions 1 3
Check Your Understanding 16-3 fall in commodity prices.Questions 1-3


1 there is a trade off between unemployment and inflation in both the short run and the long run
1) There is a trade-off between unemployment and inflation in both the short run and the long run.

  • True

  • False


2) British economists believe that the natural rate of unemployment rose from 3% to 10% during the 1970s. During that period Britain experienced a sharp acceleration of inflation. This may have been caused by positive supply shocks.

  • True

  • False


3a disinflation is costly because in order to reduce the inflation rate
3a) Disinflation is costly because in order to reduce the inflation rate:

  • unusually high inflation is necessary for a time.

  • unsustainably large increases in output are necessary.

  • taxes must increase.

  • unemployment usually must increase above the natural rate.


3b) The costs of disinflation can be reduced if the Fed doesn’t reveal its policy to reduce inflation.

  • True

  • False


Check your understanding 16 4 question 1
Check Your Understanding 16-4 doesn’t reveal its policy to reduce inflation.Question 1



1b. The ______ is when monetary policy is ineffective because the nominal interest rate cannot fall below zero.

  • liquidity trap

  • debt deflation

  • state of disinflation


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