Exam 17: The Short-Run Tradeoff Between Inflation and Unemployment

A central bank sets out to reduce unemployment by changing the money supply growth rate. The long-run Phillips curve shows that in comparison to their original rates, this policy will eventually lead to

Monetary Policy in Flosserland In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However the unemployment rate was on average higher for many years after. A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because 1) by itself the decrease in inflation had permanently increased unemployment and 2) that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage. Which of these arguments is consistent with the Phillip's curve model?

If there is a favorable supply shock which direction does the short-run Phillips curve shift? What initially happens to unemployment and inflation as a result of this shock?

If the sacrifice ratio is 2, reducing the inflation rate from 4 percent to 2 percent would

As aggregate demand shifts left along the short-run aggregate supply curve,

Which of the following is upward-sloping?

Which of the following increases inflation and reduces unemployment in the short run?

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?

Figure 35-1. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD curves. On the right-hand diagram, U represents the unemployment rate. -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively, on the left- hand graph. Then it is apparent that the price index equaled

Short-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.

The position of the long-run Phillips curve depends on

If the central bank decreases the money supply, then output

A policy change that changes the natural rate of unemployment changes

To say that the natural rate of unemployment changes over time is to say that

The long-run Phillips curve would shift left if

According to the Phillips curve, unemployment and inflation are negatively related in

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is

A country is likely to have a higher sacrifice ratio if

If the natural rate of unemployment falls,

Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.