Exam 16: The Short-Run Tradeoff between Inflation and Unemployment

Some countries have had high inflation rates for a long time and other countries have had low inflation rates for a long time.Yet in some of the high-inflation countries,the unemployment rate is not much different or even higher than in the low-inflation countries.Explain how these observations can be consistent with the Phillips curve.

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Question 1

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It is reasonable to guess that in countries with chronically high inflation,expected inflation would also be high.In the long run,countries are on their long-run Phillips curve whose position is determined by labour laws,unemployment compensation,the nature of job searches,and other real factors.These can differ across countries and so the natural rate of unemployment can differ across countries.Different rates of inflation are possible along any given long-run Phillips curve,so countries can have similar unemployment rates with different inflation rates.Also,countries with higher expected inflation have short-run Phillips curves that are farther to the right.So a country with high expected inflation is on a Phillips curve to the right of one with low expected inflation.On a higher Phillips curve,inflation and the unemployment rate can be higher than on a lower Phillips curve.

An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.

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Question 2

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Faced with an adverse supply shock,what can policymakers increase,and how will prices and output be affected?

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Question 3

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Figure 16-4 -Refer to the Figure 16-4.At point m,how do actual and expected inflation rates and unemployment rates compare?

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Question 4

According to Samuelson and Solow,when aggregate demand is high,how are unemployment,wages,and prices affected?

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Question 5

When aggregate demand increases,what happens to prices and employment?

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Question 6

Friedman argued that a central bank could use monetary policy to peg which of the following?

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Question 7

Figure 16-3 -Refer to the Figure 16-3.Starting from c and 3,in the short run,where does an unexpected increase in money supply move the economy to?

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Question 8

What did proponents of rational expectations argue about the sacrifice ratio and why?

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Question 9

Figure 16-4 -Refer to the Figure 16-4.Along SRPC3,what is the expected rate of inflation?

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Question 10

Which of the following is the misery index supposed to measure?

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Question 11

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

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Question 12

Figure 16-4 -Refer to the Figure 16-4.If the economy is at point a and the Bank of Canada pursues an expansionary monetary policy,then the economy will move to which of the following points in the short and long run?

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Question 13

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve (that is,to increase inflation and reduce unemployment)? Were they right or wrong?

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Question 14

What is the long-run effect of an increase in expected inflation predicted by the Phillips curve model?

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Question 15

What did Friedman and Phelps argue about the effectiveness of monetary policies?

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Question 16

Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.

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Question 17

According to classical macroeconomic theory,which of the following does money growth influence in the long run?

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Question 18

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

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Question 19

Suppose the long-run Phillips curve shifts to the left.For any given rate of money growth and inflation,how would unemployment and output change?

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Question 20

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An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.

Faced with an adverse supply shock,what can policymakers increase,and how will prices and output be affected?

Figure 16-4 -Refer to the Figure 16-4.At point m,how do actual and expected inflation rates and unemployment rates compare?

According to Samuelson and Solow,when aggregate demand is high,how are unemployment,wages,and prices affected?

When aggregate demand increases,what happens to prices and employment?

Friedman argued that a central bank could use monetary policy to peg which of the following?

Figure 16-3 -Refer to the Figure 16-3.Starting from c and 3,in the short run,where does an unexpected increase in money supply move the economy to?

What did proponents of rational expectations argue about the sacrifice ratio and why?

Figure 16-4 -Refer to the Figure 16-4.Along SRPC3,what is the expected rate of inflation?

Which of the following is the misery index supposed to measure?

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

Figure 16-4 -Refer to the Figure 16-4.If the economy is at point a and the Bank of Canada pursues an expansionary monetary policy,then the economy will move to which of the following points in the short and long run?

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve (that is,to increase inflation and reduce unemployment)? Were they right or wrong?

What is the long-run effect of an increase in expected inflation predicted by the Phillips curve model?

What did Friedman and Phelps argue about the effectiveness of monetary policies?

Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.

According to classical macroeconomic theory,which of the following does money growth influence in the long run?

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

Suppose the long-run Phillips curve shifts to the left.For any given rate of money growth and inflation,how would unemployment and output change?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains from Trade

The Market Forces of Supply and Demand (PART 1)

The Market Forces of Supply and Demand (PART 2)

Measuring a Nation's Income

Measuring the Cost of Living

Production and Growth

Saving,Investment,and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

Five Debates over Macroeconomic Policy

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