Exam 17: Inflation, unemployment, and Federal Reserve Policy

According to economists Robert Lucas and Thomas Sargent,the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of

If unemployment persists for a long period of time,the natural rate of unemployment rises.

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

If the long-run aggregate supply curve is vertical,

Figure 17-4 -Refer to Figure 17-4.Consider the shift in the short-run Phillips curves shown in the above graph.This shift may be explained by

Suppose that last year the unemployment rate was 5 percent and the inflation rate was 2.5 percent.If the natural rate of unemployment is 5 percent,how do you expect inflation to change?

If workers and firms ignore inflation or form their inflation expectations adaptively,expansionary monetary policy will lower unemployment permanently.

If the Fed attempts to reach and maintain very low rates of unemployment,we would expect the rate of inflation to rise.

When individuals use ________ about an economic variable to make a decision,expectations are rational.

Suppose the current inflation rate and the expected inflation rate are both 3 percent.The current unemployment rate and the natural rate of unemployment are both 4 percent.Use a Phillips curve graph to show the effect on the economy of a severe supply shock.If the Federal Reserve keeps monetary policy unchanged,what will eventually happen to the unemployment rate? Show this on your Phillips curve graph.

If wages and prices adjust slowly,we would expect expansionary monetary policy to be

Figure 17-1 -Refer to Figure 17-1.Suppose that the economy is currently at point A.If the Federal Reserve engaged in contractionary monetary policy,where would the economy end up in the short run?

Figure 17-9 -Refer to Figure 17-9.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from

The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.

Monetary policy can

In the long run,the Phillips curve is a ________ at ________.

Figure 17-1 -Refer to Figure 17-1.Suppose that the economy is currently at point A,and the unemployment rate at A is the natural rate.What policy would the Federal Reserve pursue if it wanted the economy to move to point B in the long run?

According to the short-run Phillips curve,if unemployment is 2.4% and inflation is 3.7%,a decrease in the inflation rate might result in which of the following?

The natural rate of unemployment will not change following an increase in ________ unemployment.

The long-run aggregate supply curve is ________,while the long-run Phillips curve is ________.