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

-Refer to Exhibit 6 above.Suppose the economy is operating at point D.As people revise their price expectations,

According to the theory of rational expectations,

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

The natural rate of unemployment is

If people expect less inflation in the future, then the

If people have rational expectations, a monetary policy contraction that is announced and is credible could

The pattern of employment and inflation observed during the 1970s appeared to confirm the view of Phelps and Friedman that

If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require

If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Which of the following will reduce the price level and increase real output in the long run?

-Refer to Exhibit 6 above.Suppose the economy is in long run equilibrium at point E.A sudden increase in government spending should move the economy in the direction of point

Suppose that an economy is currently experiencing 10 per cent unemployment and 15 per cent inflation.If, in the process of bringing inflation down by 2 per cent real GDP falls by 4 per cent, the sacrifice ratio is

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

According to the theory of rational expectations,

-Refer to Exhibit 6 above.If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent, the economy is operating at point

Along a short run Phillips curve, a higher rate of

Some countries have had relatively high inflation and relatively high unemployment for long periods of time.Is this consistent with the Phillips curve? Defend your answer.

When actual inflation exceeds expected inflation,

Why does a downward sloping Phillips curve imply a positive sacrifice ratio?

The Phillips curve and the short run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward.Discuss.