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29 Mar 2018

1. How is it mechanically possible for both total employment and the unemployment rate to fall? Your answer should be one to two sentences long.


2. Is it possible for nominal interest rates to be negative? Is it possible for real interest rates to be negative? Your answer should be two sentences long.


3. If expected inflation is 5% and actual inflation is 6%, what will happen to real growth? Your answer should be one to two sentences long.

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Jean Keeling
Jean KeelingLv2
31 Mar 2018

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Related questions

B Short answer (25 marks total). Answers should typically be no more than 2-3 sentences in length.

1. (5 marks) Consider the long-run model of chapter 4, and suppose inflation increases. How might this affect demand for real money balances? Explain.

2. (5 marks) Define the ex ante and ex post real interest rates, and explain why they might be different.

3. (5 marks) What is the difference between the nominal interest rate and the real interest rate? As part of your answer, define these two interest rates.

4. (5 marks) In our model of chapters 9-10, we said that output was “supply-determined” in the long run, but “demand-determined” in the short run. Explain in your own words what this means.

5. (5 marks) Explain why the IS curve is downward-sloping using the goods-market approach.

1. Nominal and real interest rates: 

a. Explain the difference between real and nominal interest rates. 

b. Which of these two interest rates is relevant for investment and consumption decisions and why? 

c. How is the real interest rate calculated ex-post? How is the real interest rate calculated ex-ante? 

 

2. Fisher parity

a. Write down the approximation formula of the Fisher parity.

b. What is the real interest rate if the nominal interest rate is 6% and the expected inflation rate is 1%?

c. How is the real interest rate affected if the expected inflation increases while the nominal interest rate remains constant?

d. Given that the nominal interest rate can’t be negative ("zero lower bound"), what is the lowest value the real interest rate can be?

Answer true or false for each of the following.

1. Most economists want a 0% target for unemployment.

2. The current natural rate of unemployment is thought to be somewhere around 5%.

3. If the economy is above full employment it causes higher than normal unemployment.

4. Inflation can be increased by either an increase in AD or AS.

5. Cyclical unemployment can be caused by a drop in AD or AS.

6. The natural rate of unemployment is associated with high inflation.

7. The core PPI is often used to predict where we are relative to full employment.

8. In a closed economy, inflation represents a decline in average real income.

9. Frictional unemployment is permanent for the labor force, temporary for individuals.

10. It is possible, although unusual, for cyclical unemployment to be negative.

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