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Krugman/Wells
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  1. 16 >> Inflation, Disinflation, and Deflation Krugman/Wells CHECK YOUR UNDERSTANDING

  2. Check Your Understanding 16-1Questions 1 and 2

  3. 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

  4. 2) Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax? • yes • no

  5. Check Your Understanding 16-2Question 1*

  6. 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

  7. Check Your Understanding 16-2Questions 1 and 2

  8. 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

  9. 2) The short-run Phillips curve shifts up in response to a fall in commodity prices. • True • False

  10. Check Your Understanding 16-3Questions 1-3

  11. 1) There is a trade-off between unemployment and inflation in both the short run and the long run. • True • False

  12. 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

  13. 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.

  14. 3b) The costs of disinflation can be reduced if the Fed doesn’t reveal its policy to reduce inflation. • True • False

  15. Check Your Understanding 16-4Question 1

  16. 1a. Do lenders typically lend at a negative nominal interest rate? • yes • no

  17. 1b. The ______ is when monetary policy is ineffective because the nominal interest rate cannot fall below zero. • liquidity trap • debt deflation • state of disinflation