Exam 17: Inflation,unemployment,and Federal Reserve Policy

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

A reduction in the rate of inflation is referred to as

The "rational expectations" school of economists,including Robert Lucas and Thomas Sargent,argue that changes in monetary policy cannot affect unemployment rates in the short run or long run.

Figure 17-9 -Refer to Figure 17-9.A follower of the new classical macroeconomics would argue that ________ like that pursued by Paul Volcker in 1979,would result in a movement from C to A.

How would you expect the Fed to respond to a negative supply shock in the economy?

A falling price level is called ________ and a fall in the rate of inflation is called ________.

What is a "structural" relationship?

The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.

A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods is called a ________ relationship.

Figure 17-3 -Refer to Figure 17-3.The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by

Use the information below to explain adjustments that move the economy to a long-run equilibrium.Assume that firms and workers have adaptive expectations. The current unemployment rate = 7%. The natural rate of unemployment = 5.5%. Last year's inflation rate = 5%. This year's inflation rate = 4%.

Figure 17-2 -Refer to Figure 17-2.Suppose the Fed used expansionary policy to push short-run equilibrium to point B.If the short-run equilibrium remained at point B long enough,

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

If the unemployment rate in the economy is steady at 4 percent per year,how does the short-run Phillips curve predict that the inflation rate will be changing,if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations.Provide an appropriate graph to support your discussion.

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy,which of the following would you expect to see?

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.

In the long run,the Fed may decrease the unemployment rate only if it is willing to increase the rate of inflation.

The ________ curves are both vertical.

Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called

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