1. chapter: ©2009  Worth Publishers >> Krugman/Wells Inflation, Disinflation, and Deflation 16 CHECK YOUR UNDERSTANDING

2. Check Your Understanding 16-1 Questions 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? 1.Yes 2.No

4. 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

5. NEW CHECK YOUR UNDERSTANDING Check Your Understanding 16-2 Question 1*

6. 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

7. Check Your Understanding 16-2 Questions 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. 1.True 2.False

9. 2) The short-run Phillips curve shifts up in response to a fall in commodity prices. 1.True 2.False

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

11. 1) There is a trade-off between unemployment and inflation in both the short run and the long run. 1.True 2.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. 1.True 2.False

13. 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.

14. 3b) The costs of disinflation can be reduced if the Fed doesn’t reveal its policy to reduce inflation. 1.True 2.False

15. Check Your Understanding 16-4 Question 1

16. 1a. Do lenders typically lend at a negative nominal interest rate? 1.yes 2.no

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