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

In recent years, inflation expectations have fallen. How did this shift the short-run Phillips curve, and what are the implications for unemployment?

Discuss the factors determining the slope of the short-run Phillips curve. Is the linear shape appropriate? Why, or why not?

Figure 17-4 -Refer to Figure 17-4. If the economy is at point c and the Bank of Canada pursues an expansionary monetary policy, then the economy will move to which point in the short and long run?

The analysis of Friedman and Phelps argues that any change in inflation that is expected has no impact on the unemployment rate.

Figure 17-1 -Refer to Figure 17-1. If the economy starts at c and 1, then in the short run, where does a decrease in the money supply growth rate move the economy?

Figure 17-3 -Refer to Figure 17-3. Starting from c and 3, in the short run, where does an unexpected decrease in money supply growth move the economy to?

Among other things, what determines the long-run average unemployment rate and inflation, respectively?

What is the misery index supposed to measure?

In the long run, what will happen if the Bank of Canada increases the rate at which it increases the money supply?

The vertical long-run Phillips curve is an exception to monetary neutrality implied by the classical dichotomy.

Figure 17-3 -Refer to Figure 17-3. When would the economy move from c and 3 to b and 2?

An estimate of the short-run Phillips curve for a hypothetical economy is u = 12 - 1.5ð, where u is the unemployment rate and ð is the inflation rate. a. If the natural rate of unemployment is 8 percent, what is the expected inflation rate that is consistent with this short-run Phillips curve? b. Suppose the government passes legislation that decreases the natural rate of unemployment by two percentage points. What is the new long-term inflation rate?

Some countries have had high inflation rates for a long time and other countries have had low inflation rates for a long time. Yet in some of the high-inflation countries, the unemployment rate is not much different or even higher than in the low-inflation countries. Explain how these observations can be consistent with the Phillips curve.

Some countries have inflation in excess of 20 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 20 percent to 8 percent?

How were inflation and unemployment from 1980 to 1989 in Canada?

More flexible labour markets will shift the long-run Phillips curve and the long-run aggregate-supply curve in which direction?

Suppose the government decides to decrease the income tax. What is the primary effect of this decision?

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by 1 percentage point.

If policymakers expand aggregate demand, what happens to inflation and unemployment?

Suppose that weather around the world is especially good next year, so farmers have unusually good crops. What might we expect that this will do to the short-run and long-run Phillips curves?