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

Figure 22-8. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate." -Refer to Figure 22-8. Faced with the shift of the Phillips curve from PC₁ to PC₂, policymakers will

In his famous article published in an economics journal in 1958, A.W. Phillips

In 2007 and 2008 households and firms reduced desired expenditures. During the same period inflation fell and unemployment rose.

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.

On a given short-run Phillips curve which of the following is not held constant?

Which of the following would not be associated with a favorable supply shock?

The sacrifice ratio of the Volcker disinflation was larger than previous estimates had predicted.

A policy that raised the natural rate of unemployment would shift

Neither monetary policy nor any government policy can change the natural rate of unemployment.

The long-run response to an increase in the growth rate of the money supply is shown by shifting

The analysis of Friedman and Phelps can be summarized in the following equation where a is positive number:

Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.

There is an adverse supply shock. In response the Federal Reserve pursues an expansionary monetary policy. Taking into account both the shock and the Federal Reserve's policy, which of the following are we sure of?

The economy will move to a point on the short-run Phillips curve where unemployment is higher if

Over the long run the Volcker disinflation

Which of the following is correct concerning the long-run Phillips curve?

Which of the following is downward-sloping?

Which of the following would cause the price level to fall and output to rise in the short run?

As the aggregate demand curve shifts rightward along a given aggregate supply curve,

In 1980, the U.S. economy had an inflation rate of