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

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

Economists generally agree that there is a short-run Phillips curve. However, some economists believe that the short-run Phillips curve is steep and that inflation expectations adjust quickly so the long run is short-lived. What do such beliefs imply about the benefits of using policy to reduce unemployment? What do such beliefs imply about the costs of using policy to reduce inflation?

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Change the expected inflation to 3 percent and draw the new Phillips curve. How did it change?

If there is a favourable supply shock, what will most likely happen?

Which statement best characterizes the theory of rational expectations?

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

In which situation will the economy move to a point on the Phillips curve where unemployment is higher?

According to Phillips, which set of two items have a negative relation?

In 1980, how did the Canadian misery index compare to the average?

In the long run, what does the inflation rate primarily depend on?

In the nineteenth century, some countries were on gold standards so that on average the money supply growth rate was close to zero and expected inflation was more or less constant. For these countries during this time period, we find that increases in inflation were generally associated with falling unemployment. Are these findings consistent with Friedman and Phelps's theories, and why?

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

In the short run, policy that decreases the aggregate demand also decreases which of the following?

Which of the following data supported A.W. Phillips' findings?

Suppose that weather around the world is especially good next year, so farmers have unusually good crops. What might we expect that this will do to the short-run and long-run Phillips curves?

If policymakers accommodate an adverse supply shock, what will happen to the unemployment rate and inflation?

Who is a leading economist in the theory of rational expectations?

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

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

How does the short-run Phillips curve reflect a financial crisis such as the one in 2008-2009?