Exam 22: The Short-Run Trade-Off Between Inflation and Unemployment

A movement to the left along a given short-run Phillips curve could be caused by

Figure 22-2 Use the pair of diagrams below to answer the following questions. -Refer to Figure 22-2. If the economy starts at C and 1, then in the short run, an increase in taxes moves the economy to

Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can.

Unexpectedly high inflation reduces unemployment in the short run, but as inflation expectations adjust the unemployment rate returns to its natural rate.

Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally good conditions for growing crops. The good weather would

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

The long-run Phillips curve would shift left if

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.

The Volcker disinflation

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point.

A change in expected inflation shifts

More flexible labor markets will shift

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

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

As an economist working for a U.S. government agency you determine that a particular country has a sacrifice ratio of 3. Policy-makers in that country are thinking of lowering the inflation rate from 10% to 4%. Is this sacrifice ratio higher or lower than the typical estimate? From your numbers, what is the amount of output that will be lost for this country to reduce its inflation rate?

If the Federal Reserve accommodates an adverse supply shock,

If policymakers decrease aggregate demand, then in the long run

Suppose the Fed increased the growth rate of the money supply. Which of the following would be higher in the long run?

Soon after he became the chairman of the Federal Reserve System in 1979, Paul Volcker embarked on a course

In the late 1960s, Milton Friedman and Edmund Phelps argued that