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

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 Flosserland. Suppose the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level. Suppose at first that the public thought inflation would only drop to 18%, but eventually become convinced that the inflation rate will stay at 12.5%.

If the central bank increases the money supply, in the short run, output

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

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

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. Also suppose we know that the price index equaled 120 in 2011. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by

In 1979, when the Fed was deciding how aggressively to fight inflation, the typical estimate of the sacrifice ratio was

Closely watched indicators such as the inflation rate and unemployment are released each month by the

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. Assuming the price level in the previous year was 100, point F on the right-hand graph corresponds to

If the central bank increases the growth rate of the money supply and initially inflation expectations are unchanged, then in the short run

Which of the following is not associated with an adverse supply shock?

The idea that the long-run Phillips curve is

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by

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

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

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

A policy intended to reduce unemployment by taking advantage of a tradeoff between inflation and unemployment leads to

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve,

Figure 35-2 Use the pair of diagrams below to answer the following questions. -Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, a decrease in the money supply moves the economy to

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

Suppose expected inflation and actual inflation are both relatively high, and unemployment is at its natural rate. If the Fed then pursues a contractionary monetary policy, which of the following results would be expected in the short run?