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

Which of the following is an example of an adverse supply shock?

In the long run people come to expect whatever inflation rate the Fed chooses to produce,so unemployment returns to its natural rate.

Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply.They make reforms to lower inflation from its current rate of 8%.Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%.Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%.Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%,show the initial long run equilibrium of Veridian and label it "A".Assuming that the government had actually set inflation at 2% and that the public believed this,label the long-run equilibrium "B".Now,suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%.Show the short-run equilibrium and label it "C".If the money supply continues to grow at a rate consistent with 4% inflation,show where the economy ends up and label that point "D".

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

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

In 2001,Congress and President Bush instituted tax cuts.According to the short-run Phillips curve,in the short run this change should have

A policy change that changes the natural rate of unemployment changes

In the late 1960s,Milton Friedman and Edmund Phelps argued that

Some countries have inflation around or in excess of 8 percent.Suppose that the sacrifice ratio is 2.5.What is the cost of reducing inflation from 8 percent to 2 percent? In your answer,define the sacrifice ratio and explain how you found the cost of inflation reduction.

Friedman and Phelps concluded that

Soon after he became the chairman of the Federal Reserve System in 1979,Paul Volcker embarked on a course

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

Refer to Monetary Policy in Southland.Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level.Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%.Then

According to Friedman and Phelps,the unemployment rate is above the natural rate when actual inflation

Which of the following is correct?

One determinant of the long-run average unemployment rate is the

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

A central bank sets out to reduce unemployment by changing the money supply growth rate.The long-run Phillips curve shows that in comparison to their original rates,this policy will eventually lead to

If the long-run Phillips curve shifts to the right,then for any given rate of money growth and inflation the economy has

According to the Phillips curve,policymakers would reduce inflation but raise unemployment if they