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

A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift right.

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

A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is

Just as the aggregate-supply curve slopes upward only in the short run, the trade-off between inflation and unemployment holds only in the short run.

If expected inflation rises but actual inflation remains the same, what happens to the unemployment rate? Defend your answer.

An increase in the inflation rate permanently reduces the natural rate of unemployment.

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

In the long run, a decrease in the money supply growth rate

If expected inflation decreases does the short-run Phillips curve shift? If so, what direction does it shift? Does the long-run Phillips curve shift? If so, what direction does it shift?

The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

What does the natural-rate hypothesis claim?

If the central bank keeps the money supply growth rate constant, but people raise their inflation expectations by 1 percentage point, then the short-run Phillips curve shifts

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.

Figure 35-3 ​ ​ -Refer to Figure 35-3. Curve 2 is the

Which of the following decreases inflation and increases unemployment in the short run?

If inflation expectations rise, the short-run Phillips curve shifts

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

The natural rate of unemployment is the same as the socially optimal rate of unemployment.

The proliferation of Internet usage serves as an example of a favorable supply shock.