Question

1. Over time, the flattening and shifting inward of the traditional Phillips Curve suggests that:

(a) the relationship between inflation and unemployment is stronger than ever;

(b) a 1% change in the inflation is now associated with smaller changes than before in the unemployment rate;

(c) every unemployment rate is now associated with a lower inflation rate than previously;

(d) the U.S. now has an R* much higher than 1%.

2. According to the modern Phillips Curve, current inflation statistically is the summation of:

(a) the real inflation rate and inflation expectations;

(b) the previous period’s inflation and the product of short-run real economic growth and the sensitivity of inflation to it;

(c) productivity growth and growth in the labor force;

(d) labor compensation and productivity growth.

3. Almost always, the normal Treasury yield curve tends to:

(a) be unaffected by monetary policy;

(b) be monotonically upward sloping;

(c) demonstrate that as time to maturity increases, expected yields tend to decline:

(d) be affected by inflation expectations.

4. All things remaining the same, the yield on a five-year Treasury note can be expected to revert to which level?

(a) the Fed’s 2% inflation target;

(b) the level of inflation expectations over a 5-year period;

(c) the average expected yield on Treasury securities 1, 2, 3, 4, and 5 years from maturity;

(d) the S&P 500 dividend yield.

Answer 1

1. When the relationship between unemployment and inflation has weakened over time this has resulted in falttening of philips curve therefore Option B is correct!! which mentions 1 % change in inflation is now associated with smaller changes in unemployment rate than before.

2. Option A is correct!!, inflation is associated with inflation expectations and real inflation rate.

3. Option B is correct, almost always yield curve is upward sloping because of higher dated securities yielding higher expected returns.

4. Option C is correct!!, 5 year yield curve is summation of 5 zero counpon bonds having maturity of 1,2,3,4 and 5 years representing average yield on them.

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