Exam 35: The Short-Run Trade-Off Between Inflation and Unemployment

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

An increase in expected inflation shifts the

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

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

Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.

How does a central bank's accommodation of an adverse supply shock change the long­run results of the shock?

One determinant of the natural rate of unemployment is the

A.W. Phillips found a

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

According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

In 1980, the U.S. misery index was

An adverse supply shock will shift short-run aggregate supply

If the Federal Reserve accommodates an adverse supply shock,

Government expenditures increase. What happens to the price level and output? Explain how the change in the price level and output effect the inflation rate and the unemployment rate.

The natural rate of unemployment

How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?

For a given level of inflation expectations, if the central bank increases the money supply growth rate, then in the short run

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.

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, an increase in the money supply growth rate moves the economy to

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.