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

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Question 51

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

A) True
B) False

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Question 52

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

A) True
B) False

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Question 53

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Figure 35-1 ​ ​ ​ ​ ​ -Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points B and C, respectively, on the left-hand graph. Also, suppose we know that the price index equaled 120 in 2019. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by

Figure 35-3 ​ ​ -Refer to Figure 35-3. The inflation rate is greatest at

If there is a decline in business confidence and the Fed desires to return unemployment towards its natural rate, what should it do? If business confidence eventually returns to normal but the Fed does not reverse its policy, what eventually happens to the inflation rate?

Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.

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

If taxes rise, then aggregate demand shifts

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

Scenario 35-2 ​ In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. -Refer to Scenario 35-2. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then

The theory by which people optimally use all available information when forecasting the future is known as

If there is an increase in the price of oil, then

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

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

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 _____.

Suppose the price level is 115.00 at the end of 2020, 112.02 at the end of 2021, and 109.08 at the end of 2022. Can we accurately describe the period 2021-2022 as a period of disinflation?

Figure 35-2 -Refer to Figure 35-2. Assume the figure depicts possible outcomes for the year 2022. In 2022, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2021 was

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?

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve,

By raising aggregate demand more than anticipated, policymakers