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? 1.Yes 2.No
2) Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax? 1.yes 2.no
NEW CHECK YOUR UNDERSTANDING Check Your Understanding 16-2 Question 1*
NEW CHECK YOUR UNDERSTANDING 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%. 1.10.2% 2.4.8% 3.-4.8% 4.0
1) There is a trade-off between unemployment and inflation in both the short run and the long run. 1.True 2.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. 1.True 2.False
3a) Disinflation is costly because in order to reduce the inflation rate: 1.unusually high inflation is necessary for a time. 2.unsustainably large increases in output are necessary. 3.taxes must increase. 4.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. 1.True 2.False