Exam 17: The Short Run Trade-Off Between Inflation and Unemployment

When actual inflation exceeds expected inflation, unemployment exceeds the natural rate.

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate.How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky wage theory to explain your answer.

Which of the following would tend to shorten recessions associated with the use of anti-inflation policies?

The original Phillips curve illustrates the

Which of the following would shift the long run Phillips curve to the right?

According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment,

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

A policy of inflation targeting generally involves targeting the future rate of inflation because

Suppose that a central bank unexpectedly pursues contractionary monetary policy.What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

-Refer to Exhibit 6 above.Suppose the economy is operating in long run equilibrium at point E.In the long run, a monetary contraction will move the economy in the direction of point

The natural rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

What did Milton Friedman and Edmund Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behaviour of the economy in the late 1960s and the 1970s prove them wrong?

When unemployment is below the natural rate the labour market is unusually tight, putting pressure on wages and prices to rise.

The natural rate hypothesis argues that

An increase in expected inflation will shift

One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that

An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.

In moving along a short run Phillips curve we are holding which of the following constant?

A sudden monetary contraction moves the economy up a short run Phillips curve, reducing unemployment and increasing inflation.

If a country's policy makers were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long run result would be