Question

Q1 For this question, assume that expected inflation this year is equal to past year's inflation. Also assume that the unemployment rate has been equal to the natural rate of unemployment for some time. Given this information, we know that:

A. the rate of inflation should be zero.

B. the rate of inflation should neither increase nor decrease.

C. the rate of inflation should steadily increase.

D. the rate of inflation should steadily decrease.

E. the natural rate of unemployment should steadily decrease.

Q2 Which of the following will likely cause an increase in output per worker?

A. an increase in education expenditures

B. an increase in the saving rate

C. an increase in on-the-job training

D. all of the above

Q3 Which of the following will reduce the inflation rate in the medium run?

A. a permanent reduction in the price of oil

B. a large budget surplus

C. a permanent reduction in inflation target

D. all of the above

E. none of the above

Answer 1

Q1

There will no change in the inflation rate if unemployment is at its natural level. Such unemployment rate is called the NAIRU (a non-accelerating inflation rate of unemployment). At this rate, the inflation rate neither increases nor decreases. The Phillips curve becomes vertical.

So, option B. is correct

Q2

Below are the parameters which increases the output per worker:

- rise in the savings rate

- rise in the stock of human capital

Increase in the education expenditures and the on-the-job training sessions raises the stock of human capital and therefore raises the output per worker.

So, all options are correct

Option D. is correct

Q3

A large budget surplus does not contain any inflationary pressures in the medium or long run. Such disruptions are present only in the short run. So, option B. is incorrect

A permanent reduction in inflation target is an indicator that the actual inflation rates are well anchored around the inflation rates. Inflation expectations about the future increase in inflation is also coming down. So, option C, is also incorrect

A permanent reduction in the price of oil raises the oil supply in the rest of the world. This positive supply shock will shift the AS from left to right. As a result, inflation will be reduced in the medium run since the effect is permanent.

So, option A. is correct

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