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

The experience of the Volcker disinflation of the early 1980s

A central bank disinflates. Output is 4% less for one year, 3% less the next year, and 2% less the third year. If inflation fell by 2 percentage points, what was the sacrifice ratio?

In the long run, a decrease in the money supply growth rate

In the long run, an increase in the money supply

Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by

The position of the long-run Phillips curve and the long-run aggregate supply curve both depend on

If the Fed were to increase the money supply, inflation would increase and unemployment would decrease in the short run.

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

In the long run, if there is an increase in the money supply growth rate, which of the following curves shifts right?

According to the short-run Phillips curve, inflation

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then

Which of the following statements is correct?

If more firms chose to pay efficiency wages, which of the following would shift to the right?

Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply. They make reforms to lower inflation from its current rate of 8%. Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%. Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%. Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%, show the initial long run equilibrium of Veridian and label it "A". Assuming that the government had actually set inflation at 2% and that the public believed this, label the long­run equilibrium "B". Now, suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%. Show the short­run equilibrium and label it "C". If the money supply continues to grow at a rate consistent with 4% inflation, show where the economy ends up and label that point "D".

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?

Figure 35-6 Use the graph below to answer the following questions. -Refer to Figure 35-6. If the economy starts at C and the money supply growth rate increases, in the long run the economy

If the central bank increases the money supply, then in the short run prices

Figure 35-7 Use the two graphs in the diagram to answer the following questions. -Refer to Figure 35-7. Starting from C and 3, in the long run, an increase in money supply growth moves the economy to

By raising aggregate demand more than anticipated, policymakers

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