Exam 35: The Short-Run Trade-Off Between Inflation and Unemployment

The increase in oil prices in the 2000s was caused primarily by:

The natural rate of unemployment is:

Suppose a country is experiencing a hyperinflation.Even a small sacrifice ratio would suggest that it would be incredibly costly for such a country to eliminate inflation.For example, suppose the sacrifice ratio is one, but inflation is running at 5000 per cent per year.Then the sacrifice ratio suggests that it would cost 50 years worth of output to get inflation to zero! This is obviously not right.Why does the sacrifice ratio not provide a good way of measuring the cost of ending a hyperinflation?

The Phillips curve simply shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate- demand curve move the economy along the short-run aggregate-supply curve.

In the short run, the Phillips curve shifts with _____ in the economy.

Phillips said that a central bank cannot use its control over nominal quantities to peg a real quantity - the real rate of interest, the rate of unemployment, the level of real national income, the real quantity of money, the rate of growth of real national income, or the rate of growth of the real quantity of money.

A typical estimate of the sacrifice ratio is five.According to Sargent, the sacrifice ratio could be much smaller than suggested by previous estimates.

Disinflation is defined as:

See the graph 16-1 below.In the short run, a decrease in the rate of growth of the money supply will move the economy from point K to point ____. Graph 16-1

The sacrifice ratio is:

When the money supply changes, the aggregate-demand curve shifts and the economy moves along a given short-run aggregate-supply curve, causing unexpected changes in output, prices, unemployment and inflation.These changes cause people to adjust their expectations of inflation, leading to shifts in the short-run aggregate-supply curve.

A vertical long-run Phillips curve occurs at the _____.

The increase in the price of oil in 2010 could be attributed to:

Samuelson and Solow believed that the Phillips curve:

NAIRU (non-accelerating inflation rate of unemployment) refers to the level of unemployment that does not result in increases in the inflation rate.

Discuss the role of the sacrifice ratio and illustrate its usefulness in policy making.

Friedman and Phelps concluded that there is no reason to think the rate of inflation would, in the long run, be related to the rate of unemployment.

Friedman and Phelps concluded that policymakers face a _____ trade-off between inflation and unemployment.

Faced with an adverse supply shock, the economy experiences an aggregate-supply curve shift to the:

Most macroeconomic variables - for example, GDP or inflation or unemployment - can be easily measured.Expectations, however, are difficult - perhaps impossible - to measure accurately.Why do macroeconomists give such prominence in their theory to such an elusive variable?