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

A central bank can reduce inflation by reducing money supply growth, but it necessarily does so at the cost of permanently raising the unemployment rate.

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

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

Other things the same, if there is an increase in the money supply growth rate that is larger than expected, then in the short run

An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead

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

A favorable supply shock causes the price level to

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

A policy change that reduces the natural rate of unemployment shifts both the long-run aggregate-supply curve and the long-run Phillips curve left.

If people correctly anticipate that inflation will fall by 1%, then

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

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

If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products, then an increase in the money supply growth rate would have at most a very short-lived affect on unemployment.

Figure 35-1 ​ ​ ​ ​ ​ -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points B and C, respectively, on the left-hand graph. Then it is apparent that the price index equaled

U.S. monetary policy in the early 1980s reduced the inflation rate by more than half.

Figure 35-5 -Refer to Figure 35-5. A significant increase in the world price of oil could explain

According to the long-run Phillips curve, in the long run monetary policy influences

In 1980, the combination of inflation and unemployment the U.S. was experiencing

If the Fed reduces inflation by 2 percentage points and this results in a 6 percentage-point increase in unemployment, then the sacrifice ratio is equal to 3.