1. What is the natural rate of unemployment? ___________________ 2. If the infla

Question

1. What is the natural rate of unemployment? ___________________

2. If the inflation rate is 5% but the public expects inflation of 0%, what is the unemployment rate? ___________________

3. Suppose that the inflation rate is zero and the Fed raises the growth rate of the money supply to 5%. Assuming the public anticipates this increase in the growth rate of the money supply, what point in the diagram above reflects the economy's new short-run equilibrium? (A,B,C, or D) __________________

4. Suppose that the inflation rate is zero and the Fed raises the growth rate of the money supply to 5%. Assuming the public does not anticipate this increase in the growth rate of the money supply, what point in the diagram above reflects the economy's new short-run equilibrium? (A,B,C, or D) __________________

5. Continuing with question 4, assuming the Fed maintains the growth rate of the money supply at 5%, what will be the economy's new long-run equilibrium point? __________________

6. Suppose that the economy is initially at point C and the Fed cuts the growth rate of the money supply to zero. If the Fed announces the cut and it has credibility with the public, what point represents the economy's short-run equilibrium? __________________

7. Continung with question 6, if the Fed does not have credibility with the public, what will the unemployment rate be in the short run? __________________

8. Continuing with question 7, what will the unemployment rate be in the long run? __________________

Explanation / Answer

1. 5

2. 2

3. C

4. D

5. C

6. B

7. A

8. 5

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