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

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.

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher

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?

Table 35-1 An economist working for the Central Bank of Fredonia estimates a Phillips curve for Fredonia and reports the following points on the estimated curve. Actual Inflation Rate (Percent) Unemployment Rate (Percent) 5 4.0 4 4.5 3 5.0 2 5.5 -Refer to Table 35-1. Which of the following statements is correct?

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should

Suppose the Fed decreased the growth rate of the money supply. Which of the following would be lower in the long run?

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

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?

In 2009, Congress and President Obama approved tax cuts and increased government spending. According to the short-run Phillips curve these policies should have

Contractionary monetary policy

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.

Milton Friedman argued that the Fed's control over the money supply could be used to peg

According to the Phillips curve, unemployment and inflation are positively related in

Which of the following would shift the long-run Phillips curve to the right?

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.

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?

Figure 35-4 -Refer to Figure 35-4. Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy?

Some countries have had relatively high inflation and relatively high unemployment for long periods of time. Is this consistent with the Phillips curve? Defend your answer.

Which of the following would reduce the natural rate of unemployment?

If the Federal Reserve increases the growth rate of the money supply, in the long run