TRUE OR FALSE
If the statement is true, skip it. If the statement is false, write a sentence that explains why the statement is false.
PART I : TRUE OR FALSE
1. Anticipated inflation tends to redistribute wealth between borrowers and lenders and redistribute incomes between employers and employees.
2. Demand-pull inflation could be caused by an increase in the money supply.
3. Anticipated inflation can cause an economy to be less efficient.
4. In order for a wage price spiral to continue, aggregate demand must continue to increase.
5. A decrease in aggregate supply can cause both an increase in prices and an increase in unemployment. This is called "stagflation".
6. If the actual rate of inflation is above the expected rate of inflation, real wages will tend to rise.
7. If the actual real wage rate is above the expected real wage rate, there will be involuntary unemployment.
8. If the real rate of interest is unexpectedly high, borrowers will tend to gain and lenders will tend to lose.
9. Rational expectations always produce accurate forecasts.
10. The best available model for forecasting inflation is the aggregate demand aggregate supply model.
11. The price level at which the short run aggregate supply curve will intersect the long run aggregate supply curve depends on the money wage.
12. The rational expectations hypothesis asserts that all people use expected aggregate demand and expected aggregate supply curves to forecast inflation.
13. If people's forecasts of inflation are accurate, real GDP will be at the full employment level.
14. If actual aggregate demand is less than expected aggregate demand, inflation will be lower than expected and real GDP will be higher than expected.
15. If aggregate supply is less than expected, the actual rate of inflation will be less than the expected rate of inflation.
16. If inflation is higher than expected, real wages will be lower than expected and employment will be lower than expected.
17. If people correctly anticipate the rate of inflation, real GDP will not change as a result of inflation.
18. When inflation occurs, the nominal interest rate tends to rise and there is little change in real interest rates.
19. Along the short-run Phillips curve, a higher rate of inflation will result in a higher rate of unemployment.
20. Along the long-run Phillips curve, a higher inflation rate lowers the rate of unemployment.
21. A higher expected inflation rate will shift the short-run Phillips curve upward.
22. At every point on the long-run Phillips curve, the actual rate of inflation is equal to the expected rate of inflation.
23. The idea that the long-run Phillips curve is vertical is known as "The Natural Rate Hypothesis".
24. To lower the expected rate of inflation, it is necessary that actual aggregate demand be held below expected aggregate demand.
25. In order to keep the actual rate of unemployment below the natural rate of unemployment, it will be necessary to have a constantly increasing rate of inflation.
PART II: FILL IN THE BLANKS
1. There are two main causes for cost-push inflation: an increase in _____________________ and an increase in the price of essential raw materials.
2. An expectation based on all the relevant information which has an expected error of zero is called a ________________________ expectation.
3. The _______________________ rate of interest adjusts the nominal rate for the rate of interest for inflation.
4. The ____________________ Phillips curve shows the relation between the inflation rate and the unemployment rate holding constant the expected inflation rate and the natural rate of unemployment.
5. The ____________________________ curve is vertical at the natural rate of unemployment.