Exam 17: The Short-Run Tradeoff Between Inflation and Unemployment

Figure 17-3 -Refer to Figure 17-3. When would the economy move from c and 3 to e and 5?

Suppose that the money supply increases. According to the Phillips curve model, what are the effects of this policy change?

Figure 17-3 -Refer to Figure 17-3. Starting from c and 3, in the long run, where does a decrease in money supply growth move the economy to?

According to Friedman and Phelps, when is the unemployment rate below the natural rate?

Which term refers to the short-run relationship between inflation and unemployment?

If technological change shifts the long-run aggregate-supply curve to the right, it will also do which of the following?

Figure 17-1 -Refer to Figure 17-1. If the economy starts at c and 1, then in the short run, where does a decrease in aggregate demand move the economy?

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

Which of the following is an adverse supply shock?

In responding to the Phillips curve hypothesis, what did Friedman argue that a central bank can peg?

Figure 17-2 -Refer to Figure 17-2. Where is the money supply growth rate the greatest?

A policy change that reduced the natural rate of unemployment would shift both the long-run aggregate-supply curve and the long-run Phillips curve left.

What did Phillips discover?

Economists generally agree that there is a short-run Phillips curve. However, some economists believe that the short-run Phillips curve is steep and that inflation expectations adjust quickly so the long run is short-lived. What do such beliefs imply about the benefits of using policy to reduce unemployment? What do such beliefs imply about the costs of using policy to reduce inflation?

What do the data for the period of 1973 through 1980 demonstrate?

An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

Proponents of rational expectations argue that failing to account for people's revised expectations led to estimates of the sacrifice ratio that were too high.

What does the position of the long-run Phillips curve depend on?

How will an adverse supply shock shift the short-run aggregate-supply curve, and what will be the effect on prices?

Some economists argue that simply and suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real reform, people expect that the government will soon start printing more money again to pay for its expenditures, and the promise to fight inflation will not be credible. Explain the importance of an inflation-reduction policy that is announced ahead of time and is credible.