Deck 35: Essay

Question 1

If expected inflation decreases does the short-run Phillips curve shift? If so,what direction does it shift? Does the long-run Phillips curve shift? If so,what direction does it shift?

Answer 1

fall.Eventually inflation expectations increase so the short-run Phillips curve shifts to the right until the economy returns to the natural rate of unemployment.

Question 2

According to the Phillips curve,which fiscal policies can be used to reduce unemployment in the short run?

Answer 2

Inflation falls and unemployment rises.The decrease in asset prices would cause consumption to fall,so aggregate demand would shift left making prices and output fall.This decrease in demand can be shown as a downward movement along a short-run Phillips curve.

Question 3

U.S.net exports fall due to recessions in foreign countries.
A.According to the aggregate demand and supply model,what happens to the price level and output in the short run?
B.According to the short-run Phillips curve what happens to inflation and unemployment in the short run?
C.If the Fed wanted to reverse the effects of this shock on output,what should it do?

Answer 3

The inflation rate rises and the unemployment rate is unchanged.

Question 4

Suppose,as in the 1970's in the U.S. ,that demographic groups which typically have higher unemployment rates become a larger percentage of the labor force.Would this have any effect on the long-run Phillips curve?

Question 5

If the Fed raised the money supply growth by more than expected then the unemployment rate would ----- in the short run.Explain the process by which the economy moves to the long run if the Fed maintains the higher money supply growth rate.

Question 6

For a given short-run Phillips curve,if expected inflation is 10% but actual inflation is 8%,is the unemployment rate above or below its natural rate?

Question 7

The Fed increases the money supply growth rate.Assuming inflation expectations remain constant,use a Phillips curve diagram to show the short-run effects of the Fed's policy.

Question 8

What does an unexpected decrease in the growth rate of the money supply do to inflation and unemployment in the short-run? What does it do to inflation and unemployment in the long run?

Question 9

Suppose that businesses become less optimistic about the future.Assuming no change in inflation expectations,how would the effects of this shock be shown on the Phillips curve diagram and what would happen to inflation and unemployment?

Question 10

What is meant by the natural rate of unemployment?

Question 11

If consumer confidence rises and inflation expectations remain unchanged,what happens to inflation and unemployment? Defend your answer.

Question 12

According to the long-run Phillips curve,if the Fed increases the growth rate of the money supply,what happens to the inflation rate and the unemployment rate in the long run?

Question 13

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.

Question 14

If asset prices fall and inflation expectations remain unchanged,what happens to inflation and unemployment? Defend your answer.

Question 15

List one specific policy that would shift the long-run Phillips curve to the right.

Question 16

What does the natural-rate hypothesis claim?

Question 17

For a given short-run Phillips curve,if expected inflation is 8% but actual inflation is 10%,is the unemployment rate above or below its natural rate?

Question 18

If expected inflation rises but actual inflation remains the same,what happens to the unemployment rate? Defend your answer.

Question 19

An increase in the natural rate of unemployment shifts the short-run Phillips curve to the -----.If the central bank sees the increase in the unemployment rate,but thinks the natural rate has remained the same and so wants to reduce unemployment,it would -------- the money supply growth rate.If it maintains this money supply growth rate,eventually the short run Phillips curve will shift ----- and unemployment will be -----.

Question 20

As the aggregate demand curve shifts to the right,what happens to the price level and output? What do these changes imply happens to the inflation rate and the unemployment rate?

Question 21

List three things that shift the short-run Phillips curve to the right.

Question 22

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

Question 23

Suppose the price level is 110.00 at the end of 2020,121.00 at the end of 2021,and 128.26 at the end of 2022.Can we accurately describe the period 2021-2022 as a period of disinflation?

Question 24

How are the effects of a favorable supply shock shown in the Phillips curve diagram? If the Fed wants to return unemployment to its natural rate after the shock,what should it do?

Question 25

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?

Question 26

How is a decrease in the natural rate of unemployment shown in the Phillips curve diagram? Does this decrease change the inflation rate?

Question 27

What is meant by accommodation?

Question 28

An increase in expected inflation.
2.An increase in the natural rate of unemployment.
3.An adverse supply shock.

Question 29

What evidence does the Volcker disinflation provide concerning the importance of inflation expectations to the costs of disinflation?

Question 30

Suppose that a central bank reduces the money supply growth rate to disinflate.What does disinflation mean? If people do not alter their inflation expectations,what happens to output and unemployment?

Question 31

If the Fed responded to an adverse supply shock by increasing the growth rate of the money supply and maintained the higher growth rate,what would eventually happen to the short-run Phillips curve? Why?

Question 32

A central bank raises the money supply growth rate and keeps it higher.As the economy moves from the short-run equilibrium created by the increase in the money supply growth back to long-run equilibrium what happens to the unemployment rate?

Question 33

If expected inflation falls but actual inflation remains the same,what happens to the unemployment rate? Defend your answer.

Question 34

What would a central bank need to do to reverse the effects of a favorable supply shock on inflation? What would its reaction do to the unemployment rate in the short run?

Question 35

A central bank raises the money supply growth rate and keeps it at that higher rate.Explain the process by which the economy moves to long-run equilibrium.

Question 36

Suppose the price level is 115.00 at the end of 2020,112.02 at the end of 2021,and 109.08 at the end of 2022.Can we accurately describe the period 2021-2022 as a period of disinflation?

Question 37

If there were a favorable supply shock and the central bank wanted to offset the change in the unemployment rate,what would it do?

Question 38

Use the sticky-wage theory of aggregate demand to explain the short-run Phillips curve.

Question 39

If there is a large and sudden but temporary increase in the price of oil,which way does the short-run Phillips curve shift? If the central bank does not respond what happens to inflation and the unemployment rate in the long run?

Question 40

Friedman and Phelps argued that it was dangerous to think of the short-run Phillips curve as a menu of options for policymakers to choose from.Explain the logic of their argument.

Question 41

Does a more steeply sloped Phillips curve make the sacrifice ratio smaller or larger than otherwise?

Question 42

Some countries have inflation around or in excess of 8 percent.Suppose that the sacrifice ratio is 2.5.What is the cost of reducing inflation from 8 percent to 2 percent? In your answer,define the sacrifice ratio and explain how you found the cost of inflation reduction.

Question 43

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?

Question 44

If there is a decline in business confidence and the Fed desires to return unemployment towards its natural rate,what should it do? If business confidence eventually returns to normal but the Fed does not reverse its policy,what eventually happens to the inflation rate?

Question 45

Assuming that rational expectations theory does not hold,if a central banks attempts to reduce the inflation rate what happens to the unemployment rate in the short-run?

Question 46

How are the effects of the financial crisis shown using the Phillips curve diagram?

Question 47

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

Question 48

Assume the natural rate of unemployment is 6%.Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 4%.

Question 49

A central bank pledges to reduce the inflation rate from 10% to 3%.People reduce their inflation expectations to 5%,but the central bank reduces inflation to 3%.What happens to the unemployment rate?

Question 50

If because they expect the central bank to disinflate,people reduce their inflation expectations,then is the sacrifice ratio larger or smaller the otherwise? Defend your answer by referring to the Phillips curve.

Question 51

In the long run what primarily determines the natural rate of unemployment? In the long run what primarily determines the inflation rate? How does this relate to the classical dichotomy?

Question 52

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Question 53

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

Question 54

A central bank pledges to reduce the inflation rate from 20% to 5%.People reduce their inflation expectations to 10%,but the central bank only reduces inflation to 15%.What happens to the unemployment rate?

Question 55

A central bank disinflates.Output falls by 3% for one year,2% the second year,and 1% the third year.If inflation fell by 2 percentage points,what was the sacrifice ratio?

Question 56

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

Question 57

Assume the natural rate of unemployment is 6%.Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 2%.

Question 58

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.

Question 59

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?

Question 60

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

Question 61

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.

Question 62

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate.How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.