Question 1

Closely watched indicators such as the inflation rate and unemployment are released each month by the

Accepted Answer

The Bureau of Labor Statistics is responsible for releasing important economic indicators such as the inflation rate and unemployment figures.

Question 2

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

Accepted Answer

The answer of Suppose that the Fed unexpectedly pursues contractionary...

Question 3

The short-run relationship between inflation and unemployment is often called

Accepted Answer

The Phillips curve represents the short-run relationship between inflation and unemployment, suggesting that lower unemployment comes with higher inflation and vice versa.

Question 4

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Accepted Answer

The answer of Why does a downward-sloping Phillips curve imply...

Question 5

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.

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The answer of Some economists argue suddenly reducing money supply...

Question 6

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

Accepted Answer

The answer of Some countries have inflation around or in...

Question 7

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 2%.

Accepted Answer

The answer of Assume the natural rate of unemployment is...

Question 8

Does a more steeply sloped Phillips curve make the sacrifice ratio smaller or larger than otherwise?

Accepted Answer

The answer of Does a more steeply sloped Phillips curve...

Question 9

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?

Accepted Answer

The answer of What did Friedman and Phelps predict would...

Question 10

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

Accepted Answer

The answer of The Phillips curve and the short-run aggregate...

Question 11

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

Accepted Answer

The short-run Phillips curve suggests that there is an inverse relationship between unemployment and inflation. When unemployment is high, it indicates that the economy is not operating at full capacity, leading to downward pressures on prices and wages as demand for goods and services decreases.

Question 12

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?

Accepted Answer

The answer of In the long run what primarily determines...

Question 13

When monetary and fiscal policymakers expand aggregate demand, which of the following costs to the economy is incurred in the short run?

Accepted Answer

When monetary and fiscal policymakers expand aggregate demand, it typically leads to an increase in the price level in the short run. This is because the increased demand for goods and services tends to push prices up, especially if the economy is near or at full capacity.

Question 14

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.

Accepted Answer

The answer of Suppose that the economy is at an...

Question 15

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

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The answer of Explain the connection between the vertical long-run...

Question 16

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 4%.

Accepted Answer

The answer of Assume the natural rate of unemployment is...

Question 17

Some countries have had relatively high inflation and relatively high unemployment for long periods of time. Is this consistent with the Phillips curve? Defend your answer.

Accepted Answer

The answer of Some countries have had relatively high inflation...

Question 18

Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

Accepted Answer

The answer of Are the effects of an increase in...

Question 19

Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply. They make reforms to lower inflation from its current rate of 8%. Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%. Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%. Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%, show the initial long run equilibrium of Veridian and label it "A". Assuming that the government had actually set inflation at 2% and that the public believed this, label the long-run equilibrium "B". Now, suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%. Show the short-run equilibrium and label it "C". If the money supply continues to grow at a rate consistent with 4% inflation, show where the economy ends up and label that point "D".

Accepted Answer

The answer of Suppose that the Prime Minister and Parliament...

Question 20

One determinant of the long-run average unemployment rate is the

Accepted Answer

The long-run average unemployment rate can be influenced by factors such as the minimum wage, which can affect the cost of labor and thus hiring practices. The inflation rate, on the other hand, is primarily influenced by the growth rate of the money supply, as per the quantity theory of money, which posits that the amount of money in circulation is a key driver of inflation.

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

Closely watched indicators such as the inflation rate and unemployment are released each month by the

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

The short-run relationship between inflation and unemployment is often called

Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 2%.

Does a more steeply sloped Phillips curve make the sacrifice ratio smaller or larger than otherwise?

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?

The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

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?

When monetary and fiscal policymakers expand aggregate demand, which of the following costs to the economy is incurred in the short run?

Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

Assume the natural rate of unemployment is 6%. Draw the short-run and long-run Phillips curves and show the position of the economy if expected inflation is 3% and the actual inflation rate is 4%.

Some countries have had relatively high inflation and relatively high unemployment for long periods of time. Is this consistent with the Phillips curve? Defend your answer.

Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

One determinant of the long-run average unemployment rate is the