Exam 35: The Short-Run Tradeoff Between Inflation and Unemployment

In the nineteenth century, some countries were on a gold standard so that on average the money supply growth rate was close to zero and expected inflation was more or less constant. For these countries during this time period, we find that increases in actual inflation were generally associated with falling unemployment. These findings

Which of the following is not associated with an adverse supply shock?

The equation, ​ Unemployment rate = Natural rate of unemployment - a × (Αctual inflation - Expected inflation), ​

Closely watched indicators such as the inflation rate and unemployment are released each month by the

If the central bank decreases the money supply, then in the short run prices

A central bank disinflates. Output falls by 3% for one year, 2% the second year, and 1% the third year. If inflation fell by 2 percentage points, what was the sacrifice ratio?

If people anticipate higher inflation, but inflation remains the same then

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was

Which of the following is upward-sloping?

If policymakers decrease aggregate demand, then in the short run the price level

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point.

When monetary and fiscal policymakers expand aggregate demand, which of the following costs is incurred in the short run?

For a given short-run Phillips curve, if expected inflation is 10% but actual inflation is 8%, is the unemployment rate above or below its natural rate?

​In a famous article published in 1958, A.W. Phillips used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

A decrease in government expenditures serves as an example of an adverse supply shock.

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply. They make reforms to lower inflation from its current rate of 8%. Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%. Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%. Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%, show the initial long run equilibrium of Veridian and label it "A". Assuming that the government had actually set inflation at 2% and that the public believed this, label the long-run equilibrium "B". Now, suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%. Show the short-run equilibrium and label it "C". If the money supply continues to grow at a rate consistent with 4% inflation, show where the economy ends up and label that point "D".

If because they expect the central bank to disinflate, people reduce their inflation expectations, then is the sacrifice ratio larger or smaller the otherwise? Defend your answer by referring to the Phillips curve.

As the aggregate demand curve shifts to the right, what happens to the price level and output? What do these changes imply happens to the inflation rate and the unemployment rate?

The short-run Phillips curve is based on the classical dichotomy.