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

A central bank disinflates. Output is 4% less for one year, 3% less the next year, and 2% less the third year. If inflation fell by 2 percentage points, what was the sacrifice ratio?

Which of the following depends primarily on the growth rate of the money supply?

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

If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

The natural rate of unemployment

Proponents of rational expectations argued that the sacrifice ratio

The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the

For a given level of inflation expectations, if the central bank increases the money supply growth rate, then in the short run

If there is a decline in business confidence and the Fed desires to return unemployment towards its natural rate, what should it do? If business confidence eventually returns to normal but the Fed does not reverse its policy, what eventually happens to the inflation rate?

What does an unexpected decrease in the growth rate of the money supply do to inflation and unemployment in the short-run? What does it do to inflation and unemployment in the long run?

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

On a given short-run Phillips curve which of the following is held constant?

Suppose that businesses become less optimistic about the future. Assuming no change in inflation expectations, how would the effects of this shock be shown on the Phillips curve diagram and what would happen to inflation and unemployment?

In the late 1960's, Milton Friedman and Edmund Phelps argued that a tradeoff between inflation and unemployment

The Fed increases the money supply growth rate. Assuming inflation expectations remain constant, use a Phillips curve diagram to show the short-run effects of the Fed's policy.

Friedman argued that the Fed could use monetary policy to peg

A favorable supply shock will shift short-run aggregate supply

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then

After an oil price shock, which of the following would move unemployment back towards its natural rate?

Friedman argued that the Fed could use monetary policy to peg