Exam 35: The Short-Run Tradeoff Between Inflation and Unemployment

If consumer confidence falls, then aggregate demand shifts

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

To say that the natural rate of unemployment changes over time is to say that

In the long run, if the Fed decreases the rate at which it increases the money supply,

If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points and unemployment rise 3 percentage points for six months, the sacrifice ratio is

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, then in the short run the economy moves to

If a central bank decreases the money supply, then

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action will raise inflation and lower unemployment.

Suppose Congress decides to reduce government expenditures by reducing its purchases of weapons systems. Which of the following would you expect to occur as a result of this change?

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.

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

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

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

In the United States during the 1970s, expected inflation

In the long run, the natural rate of unemployment depends primarily on the growth rate of the money supply.

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?

Unemployment would decrease and prices would increase if

If inflation expectations rise, the short-run Phillips curve shifts

Just as the aggregate-supply curve slopes upward only in the short run, the trade-off between inflation and unemployment holds only in the short run.

The short-run relationship between inflation and unemployment is often called