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

If expected inflation increases,the short-run Phillips curve will shift to the left so that inflation will be higher at any given unemployment rate.

Other things the same,a decrease in aggregate demand decreases both inflation and unemployment.

According to the Phillips curve,policymakers can reduce both inflation and unemployment by increasing the money supply.

Other things the same,if the Fed increases the rate at which it increases the money supply then the short-run Phillips curve shifts right in the long run.

According to the Friedman-Phelps analysis,in the long run actual inflation equals expected inflation and unemployment is at its natural rate.

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

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

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment.

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.

In a famous article published in 1958,A.W.Phillips used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K.and the U.K.unemployment rate.

The natural rate of unemployment is the same as the socially optimal rate of unemployment.

Fiscal policy cannot be used to move the economy along the short-run Phillips curve.

If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products,then an increase in the money supply growth rate would have at most a very short-lived affect on unemployment.

Just as the aggregate-demand curve slopes downward only in the short run,the trade-off between inflation and unemployment holds only in the long run.

A central bank announces it will decrease the inflation rate by 10 percentage points.People are skeptical of the announcement,but do expect the central bank will reduce inflation by 5 percentage points and so expected inflation falls by 5 percentage points.If the central bank decreases inflation by only 3 percentage points then the unemployment rate will fall.

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

The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

Friedman and Phelps believed that the natural rate of unemployment was constant.

The proliferation of Internet usage serves as an example of a favorable supply shock.

A low sacrifice ratio would make a central bank less willing to reduce the inflation rate.