Question 31 Figure 17-2 Refer to Figure 17-2. Suppose the economy is at point C.

Question

Question 31

Figure 17-2 Refer to Figure 17-2. Suppose the economy is at point C. If the Fed decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant.

eventually move to point A
eventually move to point B
stay at point C
move to point A and then back to point B

Question 32

If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve

expansionary monetary policy is especially effective.
expansionary monetary policy is ineffective.
expansionary monetary policy is effective in the short run, but not the long run.
expansionary monetary policy is effective in the short run and the long run.

Question 33

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see?

The Fed's policies will be deflationary.
The Fed's policies will be inflationary.
The rate of inflation will fall as the Fed tries to reduce the unemployment rate.
The Fed will reduce the natural rate of unemployment.

Explanation / Answer

QUESTION 31 - You didn't include the graph

QUESTION 32 -

If both firms and the workers have rational expectations and full information about Fed's policy stance, then an expansionary monetary policy will be effective only in short run but not in long run (since in long run, prices and wages will rapidly adjust).

QUESTION 33 - Fed's policies will be inflationary.

Unemployment can be reduced using expansionary monetary policy, which will increase money supply, aggregate demand and demand for labor. But as aggregate demand rises, price level rises, leading to higher inflation rate.

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