Deck 35: The Short-Run Tradeoff Between Inflation and Unemployment

Question 1

If the Fed were to increase the money supply, inflation would increase and unemployment would decrease in the short run.

Answer 1

True

Question 2

A policy change that reduces the natural rate of unemployment shifts both the long-run aggregate-supply curve and the long-run Phillips curve left.

Answer 2

False

Question 3

The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

Answer 3

False

Question 4

Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible economic outcomes.

Question 5

Unexpectedly high inflation reduces unemployment in the short run, but as inflation expectations adjust the unemployment rate returns to its natural rate.

Question 6

The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.

Question 7

The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output.

Question 8

Neither monetary policy nor any government policy can change the natural rate of unemployment.

Question 9

Friedman and Phelps believed that the natural rate of unemployment was constant.

Question 10

Fiscal policy cannot be used to move the economy along the short-run Phillips curve.

Question 11

The short-run Phillips curve is based on the classical dichotomy.

Question 12

A given short-run Phillips curve shows that an increase in the inflation rate will be accompanied by a lower unemployment rate in the short run.

Question 13

In the long run, the natural rate of unemployment depends primarily on the growth rate of the money supply.

Question 14

The classical notion of monetary neutrality is consistent both with a vertical long-run aggregate-supply curve and with a vertical long-run Phillips curve.

Question 15

If monetary policy moves unemployment below its natural rate, both expected and actual inflation will rise.

Question 16

Short-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.

Question 17

Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.

Question 18

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

Question 19

In the long run, the inflation rate depends primarily on the growth rate of the money supply.

Question 20

Other things the same, a decrease in aggregate demand decreases both inflation and unemployment.

Question 21

A decrease in government expenditures serves as an example of an adverse supply shock.

Question 22

An adverse supply shock shifts the short-run Phillips curve right. If people raise their inflation expectations, the short-run Phillips curve shifts farther right.

Question 23

A central bank announces it will decrease the inflation rate by 10 percentage points. People are skeptical of the announcement, but do expect the central bank will reduce inflation by 5 percentage points and so expected inflation falls by 5 percentage points. If the central bank decreases inflation by only 3 percentage points then the unemployment rate will fall.

Question 24

An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.

Question 25

In the Friedman-Phelps analysis, when inflation is less than expected, the unemployment rate is less than the natural rate.

Question 26

The proliferation of Internet usage serves as an example of a favorable supply shock.

Question 27

An increase in the inflation rate permanently reduces the natural rate of unemployment.

Question 28

Other things the same, if the Fed increases the rate at which it increases the money supply then the short-run Phillips curve shifts right in the long run.

Question 29

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment.

Question 30

An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

Question 31

Just as the aggregate-demand curve slopes downward only in the short run, the trade-off between inflation and unemployment holds only in the long run.

Question 32

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

Question 33

The natural rate of unemployment is the same as the socially optimal rate of unemployment.

Question 34

In most of the 1970s, the Fed's policy created expectations of high inflation.

Question 35

According to the Friedman-Phelps analysis, in the long run actual inflation equals expected inflation and unemployment is at its natural rate.

Question 36

An increase in the natural rate of unemployment shifts the long-run Phillips curve to the right.

Question 37

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

Question 38

Just as the aggregate-supply curve slopes upward only in the short run, the trade-off between inflation and unemployment holds only in the short run.

Question 39

An adverse supply shock shifts the short-run Phillips curve to the left.

Question 40

If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products, then an increase in the money supply growth rate would have at most a very short-lived affect on unemployment.

Question 41

If consumer confidence rises and inflation expectations remain unchanged, what happens to inflation and unemployment? Defend your answer.

Question 42

A low sacrifice ratio would make a central bank less willing to reduce the inflation rate.

Question 43

U.S. net exports fall due to recessions in foreign countries.
A. According to the aggregate demand and supply model, what happens to the price level and output in the short run?
B. According to the short-run Phillips curve what happens to inflation and unemployment in the short run?
C. If the Fed wanted to reverse the effects of this shock on output, what should it do?

Question 44

Suppose that businesses become less optimistic about the future. Assuming no change in inflation expectations, how would the effects of this shock be shown on the Phillips curve diagram and what would happen to inflation and unemployment?

Question 45

Proponents of rational expectations argue that failing to account for peoples' revised inflation expectations led to estimates of the sacrifice ratio that were too high.

Question 46

According to the Phillips curve, which fiscal policies can be used to reduce unemployment in the short run?

Question 47

As the aggregate demand curve shifts to the right, what happens to the price level and output? What do these changes imply happens to the inflation rate and the unemployment rate?

Question 48

The sacrifice ratio of the Volcker disinflation was larger than previous estimates had predicted.

Question 49

​If expected inflation increases, the short-run Phillips curve will shift to the left so that inflation will be higher at any given unemployment rate.

Question 50

According to the long-run Phillips curve, if the Fed increases the growth rate of the money supply, what happens to the inflation rate and the unemployment rate in the long run?

Question 51

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action will raise inflation and lower unemployment.

Question 52

A central bank can reduce inflation by reducing money supply growth, but it necessarily does so at the cost of permanently raising the unemployment rate.

Question 53

If asset prices fall and inflation expectations remain unchanged, what happens to inflation and unemployment? Defend your answer.

Question 54

Government expenditures increase. What happens to the price level and output? Explain how the change in the price level and output effect the inflation rate and the unemployment rate.

Question 55

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point.

Question 56

If the Fed reduces inflation by 2 percentage points and this results in a 6 percentage-point increase in unemployment, then the sacrifice ratio is equal to 3.

Question 57

​According to the Phillips curve, policymakers can reduce both inflation and unemployment by increasing the money supply.

Question 58

U.S. monetary policy in the early 1980s reduced the inflation rate by more than half.

Question 59

A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift right.

Question 60

​In a famous article published in 1958, A.W. Phillips used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

Question 61

For a given short-run Phillips curve, if expected inflation is 8% but actual inflation is 10%, is the unemployment rate above or below its natural rate?

Question 62

What is meant by the natural rate of unemployment?

Question 63

List three things that shift the short-run Phillips curve to the right.

Question 64

Friedman and Phelps argued that it was dangerous to think of the short-run Phillips curve as a menu of options for policymakers to choose from. Explain the logic of their argument.

Question 65

For a given short-run Phillips curve, if expected inflation is 10% but actual inflation is 8%, is the unemployment rate above or below its natural rate?

Question 66

If expected inflation decreases does the short-run Phillips curve shift? If so, what direction does it shift? Does the long-run Phillips curve shift? If so, what direction does it shift?

Question 67

Write the equation representing the short-run Phillips curve.

Question 68

A central bank raises the money supply growth rate and keeps it at that higher rate. Explain the process by which the economy moves to long-run equilibrium.

Question 69

Use the sticky-wage theory of aggregate demand to explain the short-run Phillips curve.

Question 70

An increase in the natural rate of unemployment shifts the short-run Phillips curve to the _____. If the central bank sees the increase in the unemployment rate, but thinks the natural rate has remained the same and so wants to reduce unemployment, it would ________ the money supply growth rate. If it maintains this money supply growth rate, eventually the short run Phillips curve will shift _____ and unemployment will be _____.

Question 71

If the Fed raised the money supply growth by more than expected then the unemployment rate would _____ in the short run. Explain the process by which the economy moves to the long run if the Fed maintains the higher money supply growth rate.

Question 72

How is a decrease in the natural rate of unemployment shown in the Phillips curve diagram? Does this decrease change the inflation rate?

Question 73

List one specific policy that would shift the long-run Phillips curve to the right.

Question 74

Suppose, as in the 1970's in the U.S., that demographic groups which typically have higher unemployment rates become a larger percentage of the labor force. Would this have any effect on the long-run Phillips curve?

Question 75

A central bank raises the money supply growth rate and keeps it higher. As the economy moves from the short-run equilibrium created by the increase in the money supply growth back to long-run equilibrium what happens to the unemployment rate?

Question 76

What does the natural-rate hypothesis claim?

Question 77

What does an unexpected decrease in the growth rate of the money supply do to inflation and unemployment in the short-run? What does it do to inflation and unemployment in the long run?

Question 78

If expected inflation rises but actual inflation remains the same, what happens to the unemployment rate? Defend your answer.

Question 79

If expected inflation falls but actual inflation remains the same, what happens to the unemployment rate? Defend your answer.

Question 80

The Fed increases the money supply growth rate. Assuming inflation expectations remain constant, use a Phillips curve diagram to show the short-run effects of the Fed's policy.