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The Short-Run Trade-Off between Inflation and UnemploymentSHORT ANSWERMULTIPLE CHOICE - The Short-Run Trade-off Between Inflation and Unemployment-IntroductionThe Short-Run Trade-off Between inflation and Unemployment-The Phillips CurveThe Short-Run Trade-off between Inflation and Unemployment-Shifts in the Phillips Curve the Role of ExpectationsThe Short-Run Trade-Off between Inflation and Unemployment-Shifts in the Phillips Curve-The Role of Supply ShocksThe Short-Run Trade-off between Inflation And Unemployment-The Cost Of Reducing InflationThe Short-Run Trade-Off between Inflation and Unemployment TRUE/FALSE 1. In the long run, the natural rate of unemployment depends primarily on the growth rate of the money supply.ANS: F2. In the long run, the inflation rate depends primarily on the growth rate of the money supply..ANS: T3. Short-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.ANS: T 4. Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run.ANS: T 5. 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.ANS: T6. The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.ANS: F 7. The logic behind the tradeoff between inflation and unemployment is that high aggregate demandputs upward pressure on wages and prices while raising output.ANS: T 8. Unexpectedly high inflation reduces unemployment in the short run, but as inflation expectations adjust the unemployment rate returns to its natural rate.ANS: T 9. Fiscal policy cannot be used to move the economy along the short-run Phillips curve.ANS: F 10. If the Fed were to increase the money supply, inflation would increase and unemployment would decrease in the short run.ANS: T 11. Friedman and Phelps believed that the natural rate of unemployment was constant.ANS: F 12. The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.ANS: T13. The short-run Phillips curve is based on the classical dichotomy.ANS: F 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.ANS: T15. Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can.ANS: T 16. 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.ANS: F 17. An increase in the natural rate of unemployment shifts the long-run Phillips curve to the right.ANS: T 18. In the long run people come to expect whatever inflation rate the Fed chooses to produce, so unemployment returns to its natural rate.ANS: T 19. The analysis of Friedman and Phelps argues that an expected change in inflation has no impact on the unemployment rate.ANS: T 20. In the Friedman-Phelps analysis, when inflation is less than expected, the unemployment rate is less than the natural rate.ANS: F 21. According to the Friedman-Phelps analysis, in the long run actual inflation equals expected inflation and unemployment is at its natural rate.ANS: T22. An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.ANS: T 23. A decrease in government expenditures serves as an example of an adverse supply shock.ANS: F24. An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.ANS: T25. In most of the 1970s, the Fed's policy created expectations of high inflation.ANS: T 26. The proliferation of Internet usage serves as an example of a favorable supply shock.ANS: T 27. A decrease in the growth rate of the money supply eventually causes the short-run Phillips curveto shift right.ANS: F 28. The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point.ANS: F29. A low sacrifice ratio would make a central bank less willing to reduce the inflation rate.ANS: F30. 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.ANS: T31. The sacrifice ratio of the Volcker disinflation was larger than previous estimates had predicted.ANS: F 32. 32. U.S. monetary policy in the early 1980s reduced the inflation rate by more than half.ANS: TSHORT ANSWER1. In the long run what primarily determines the natural rate of unemployment? In the long run what primarily determines the inflation rate? How does this relate to the classical dichotomy?ANS: In the long run the natural rate of unemployment is primarily determined by labor marketfactors including government policy concerning minimum wages and unemployment benefits. In the long run inflation is primarily determined by money supply growth. These determinants are consistent with the classical dichotomy which states that real and nominal variables are determined independently.2. Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.ANS: Consider what happens when the aggregate-demand curve shifts. For example, suppose there is an increase in aggregate demand. The aggregate demand and supply model shows that prices and output will rise. Rising prices mean that there is inflation. Rising output means falling unemployment. Thus, a shift in the aggregate-demand curve along the aggregate-supply curve corresponds to a movement along the Phillips curve. 3. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.ANS: The Phillips curve shows the relation between inflation and unemployment. The short-runaggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.


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ECU ECON 2133 - Study Guide

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