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

Figure 35-4 -Refer to Figure 35-4. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to

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.

An adverse supply shock shifts the short-run Phillips curve right. If people raise their inflation expectations, the short-run Phillips curve shifts farther right.

Figure 35-3 ​ ​ -Refer to Figure 35-3. If the economy starts at C and the money supply growth rate increases, in the long run the economy

The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

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

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

Write the equation representing the short-run Phillips curve.

When monetary and fiscal policymakers expand aggregate demand, which of the following costs to the economy is incurred in the short run?

Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can.

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?

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.

Proponents of rational expectations argue that failing to account for peoples' revised inflation expectations led to estimates of the sacrifice ratio that were too high.

Disinflation would eventually cause

A change in expected inflation shifts

Other things the same, if the Fed increases the rate at which it increases the money supply then the short-run Phillips curve shifts right in the long run.

​In a famous article published in 1958, A.W. Phillips used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

Figure 35-5 -Refer to Figure 35-5. A movement of the economy from point A to point B, and at the same time a movement from point C to point D, would be described as

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%.