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

A group of economists offer the theory that the economy will reduce inflation without the cost of _____ if people are rational.

If the long-run Phillips curve shifts to the left, the economy will experience a(n) ____ short-run trade-off between inflation and unemployment.

According to rational expectations theory, a credible commitment to low inflation increases the cost of disinflation, because people are rational.

Suppose that the RBA increases the money supply.What will happen to unemployment in the short run? What will happen to unemployment in the long run?

Most economists believe that:

The natural rate of unemployment is:

Proponents of rational expectations theory argue that when government policies change, people adjust their expectations accordingly, and that failure to include that fact once led to estimates of the sacrifice ratio that were unreliable guides to policy.

The Phillips curve is the short-run relationship between inflation and unemployment.

If the sacrifice ratio is 6 per cent, then reducing the inflation rate from 10 per cent to 4 per cent would require sacrificing _____ per cent of annual output.

The Phillips curve implies that the economy faces a:

The _____ Phillips curve is downward sloping and the _____ Phillips curve is vertical.

Okun's law tells us that greater output means a lower rate of unemployment.Thus, an increase in aggregate demand moves the economy along the Phillips curve to a point with lower unemployment and higher inflation.

If the sacrifice ratio is five, it means that in order to reduce inflation by one percentage point, the economy will experience _____.

If the sacrifice ratio is 5 per cent, reducing the inflation rate from 10 per cent to 5 per cent would require sacrificing _____ per cent of annual output.

If decreases in money supply or cuts in government contract aggregate demand, they can lower inflation in the short run, but only at the expense of higher unemployment.

If the sacrifice ratio is 5 per cent, then reducing the inflation rate from 12 per cent to 4 per cent would require sacrificing _____ per cent of annual output.

Contractionary monetary policy contracts aggregate demand, reduces employment and inflation, and eventually reduces expected inflation, causing the short-run Phillips curve to shift downwards.