If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve?
What will be an ideal response?
Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Federal Reserve follows an expansionary monetary policy, inflation will rise. If expectations about inflation are adaptive, the expansionary monetary policy will increase actual inflation above expected inflation. With no adjustment in nominal wages, the real wage will fall, and the unemployment rate will be pushed below its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a short-run Phillips curve.
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a. True b. False Indicate whether the statement is true or false
Net domestic product
a. represents total wages and salaries in an economy b. equals GDP minus indirect business taxes c. equals GDP minus capital depreciation d. equals C + I + G + (X – M) e. is the value of existing capital stock used up in making goods
Suppose an economy exhibits general conditions of downward-sloping labor demand, upward-sloping supplies of domestic and immigrant labor, and a competitive labor market. Which of the following is not a likely outcome of immigration?
A. Some economic surplus will transfer from domestic workers to domestic firms. B. Domestic workers who keep their job will experience an increase in earnings. C. Economic surplus will increase in the destination country, even net of immigrant earnings. D. Domestic workers will experience some job losses. E. The market-clearing wage will fall.
The downward slope of the aggregate demand curve shows that
A. an increase in aggregate demand reduces the long-run aggregate supply. B. a higher price level will cause planned purchase rates for final goods and services to be higher. C. a lower price level will cause planned purchase rates for final goods and services to be higher. D. an increase in aggregate demand increases the long-run aggregate supply.