Deck 35: The Short-Run Trade-Off Between Inflation and Unemployment

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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.

Question 11

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 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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?

Question 27

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.

Question 28

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

Question 29

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 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

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?

Question 32

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.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

A.W.Phillips' findings were based on data

A) from 1861-1957 for the United Kingdom.
B) from 1861-1957 for the United States.
C) mostly from the post-World War II period in the United Kingdom.
D) mostly from the post-World War II period in the United States.

Question 42

The misery index is calculated as the

A) inflation rate plus the unemployment rate.
B) unemployment rate minus the inflation rate.
C) actual inflation rate minus the expected inflation rate.
D) natural unemployment rate times the inflation rate

Question 43

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.

Question 44

Phillips found a negative relation between

A) output and unemployment.
B) output and employment.
C) wage inflation and unemployment.
D) None of the above is correct.

Question 45

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

A) the Classical Dichotomy.
B) Money Neutrality.
C) the Phillips curve.
D) None of the above is correct.

Question 46

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".

Question 47

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

A) market power of unions,while the inflation rate depends primarily upon government spending.
B) minimum wage,while the inflation rate depends primarily upon the money supply growth rate.
C) rate of growth of the money supply,while the inflation rate depends primarily upon the market power of unions.
D) existence of efficiency wages,while the inflation rate depends primarily upon the extent to which firms are competitive.

Question 48

In his famous article published in an economics journal in 1958,A.W.Phillips

A) used data for the United States to show a negative relationship between the rate of change of the U.S.consumer price index and the U.S.unemployment rate.
B) used data for the United States to show a negative relationship between the rate of change of wages in the U.S.and the U.S.unemployment rate.
C) used data for the United Kingdom to show a negative relationship between the rate of change of the U.K.consumer price index and the U.K.unemployment rate.
D) 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 49

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.

Question 50

In the long run inflation

A) and unemployment are primarily determined by labor market factors.
B) and unemployment are primarily determined by the rate of money supply growth.
C) is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors.
D) is primarily determined by labor market factors while unemployment is primarily determined by the rate of money supply growth.

Question 51

In the long run,

A) the natural rate of unemployment depends primarily on the level of aggregate demand.
B) inflation depends primarily upon the money supply growth rate.
C) there is a tradeoff between the inflation rate and the natural rate of unemployment.
D) All of the above are correct.

Question 52

The economist A.W.Phillips published a famous article in 1958 in which he showed a

A) negative correlation between the rate of unemployment and the rate of inflation.
B) positive correlation between the rate of unemployment and the rate of inflation.
C) negative correlation between the rate of unemployment and the rate of interest.
D) positive correlation between the rate of unemployment and the rate of interest

Question 53

In the short run

A) unemployment and inflation are positively related.In the long run they are largely unrelated problems.
B) and in the long run inflation and unemployment are positively related.
C) unemployment and inflation are negatively related.In the long run they are largely unrelated problems.
D) and in the long run inflation and unemployment are negatively related.

Question 54

In the long run,

A) the natural rate of unemployment depends primarily on the level of aggregate demand.
B) inflation depends primarily upon the money supply growth rate.
C) there is a tradeoff between the inflation rate and the natural rate of unemployment.
D) All of the above are correct.

Question 55

One determinant of the natural rate of unemployment is the

A) rate of growth of the money supply.
B) minimum wage rate.
C) expected inflation rate.
D) All of the above are correct.

Question 56

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

A) Bureau of the Budget.
B) Bureau of Labor Statistics.
C) Department of the Treasury.
D) President's Council of Economic Advisors.

Question 57

Phillips found a

A) positive relation between unemployment and inflation in the United Kingdom.
B) positive relation between unemployment and inflation in the United States.
C) negative relation between unemployment and inflation in the United States.
D) negative relation between unemployment and inflation in the United Kingdom.

Question 58

The misery index is supposed to measure the

A) social cost of unemployment.
B) health of the economy.
C) lost output associated with a particular unemployment rate.
D) short-run tradeoff between inflation and unemployment.

Question 59

The misery index is supposed to measure the

A) social cost of unemployment.
B) health of the economy.
C) lost output associated with a particular unemployment rate.
D) short-run tradeoff between inflation and unemployment.

Question 60

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.

Question 61

Suppose that the money supply increases.In the short run,this increases prices according to

A) both the short-run Phillips curve and the aggregate demand and aggregate supply model.
B) neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
C) the short-run Phillips curve,but not the aggregate demand and aggregate supply model.
D) the aggregate demand and aggregate supply model but not the short-run Phillips curve.

Question 62

According to the Phillips curve,policymakers could reduce both inflation and unemployment by

A) increasing the money supply.
B) increasing government expenditures.
C) raising taxes.
D) None of the above is correct.

Question 63

Samuelson and Solow reasoned that when aggregate demand was low,unemployment was

A) high,so there was upward pressure on wages and prices.
B) high,so there was downward pressure on wages and prices.
C) low,so there was upward pressure on wages and prices.
D) low,so there was downward pressure on wages and prices.

Question 64

If the government raises government expenditures,then in the short run prices

A) rise and unemployment falls.
B) fall and unemployment rises.
C) and unemployment rise.
D) and unemployment fall.

Question 65

A.W.Phillips's discovery of a particular relationship between unemployment and inflation for the United Kingdom

A) could not be extended to other countries,despite many researchers' attempts to provide that extension.
B) was quickly extended to other countries by researchers.
C) was extended to only one other country - the United States.
D) was harshly criticized by the American economists Paul Samuelson and Robert Solow on the grounds that Phillips's study was fundamentally flawed.

Question 66

According to the Phillips curve,policymakers would reduce inflation but raise unemployment if they

A) decreased the money supply.
B) increased government expenditures.
C) decreased taxes.
D) None of the above is correct.

Question 67

Samuelson and Solow believed that the Phillips curve

A) implied that low unemployment was associated with low inflation.
B) indicated that the aggregate supply and aggregate demand model was incorrect.
C) offered policymakers a menu of possible economic outcomes from which to choose.
D) All of the above are correct.

Question 68

If a central bank increases the money supply,then

A) prices,output,and unemployment rise.
B) prices and output rise and unemployment falls.
C) prices rise and output and unemployment fall.
D) prices fall and output and unemployment rise.

Question 69

In the short run,policy that changes aggregate demand changes

A) both unemployment and the price level.
B) neither unemployment nor the price level.
C) only unemployment.
D) only the price level.

Question 70

If policymakers increase aggregate demand,then in the short run the price level

A) falls and unemployment rises.
B) and unemployment fall.
C) and unemployment rise.
D) rises and unemployment falls.

Question 71

If the central bank increases the money supply,then in the short run prices

A) rise and unemployment falls.
B) fall and unemployment rises.
C) and unemployment rise.
D) and unemployment fall.

Question 72

If policymakers decrease aggregate demand,then in the short run the price level

A) falls and unemployment rises.
B) and unemployment fall.
C) and unemployment rise.
D) rises and unemployment falls.

Question 73

Samuelson and Solow reasoned that when aggregate demand was high,unemployment was

A) low,so there was upward pressure on wages and prices.
B) low,so there was downward pressure on wages and prices.
C) high,so there was upward pressure on wages and prices.
D) high,so there was downward pressure on wages and prices.

Question 74

If the central bank decreases the money supply,then in the short run prices

A) rise and unemployment falls.
B) fall and unemployment rises.
C) and unemployment rise.
D) and unemployment fall.

Question 75

As aggregate demand shifts right along the aggregate supply curve,

A) inflation and unemployment are higher.
B) inflation is higher and unemployment is lower.
C) unemployment is higher and inflation is lower.
D) unemployment and inflation are lower.

Question 76

Unemployment would decrease and prices increase if

A) aggregate demand shifted right.
B) aggregate demand shifted left.
C) aggregate supply shifted right.
D) aggregate supply shifted left.

Question 77

The short-run Phillips curve shows the combinations of

A) unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.
B) unemployment and inflation that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve.
C) real GDP and the price level that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve.
D) None of the above is correct.

Question 78

There is a

A) short-run tradeoff between inflation and unemployment.
B) short-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
C) long-run tradeoff between inflation and unemployment.
D) long-run tradeoff between the actual unemployment rate and the natural rate of unemployment.

Question 79

Samuelson and Solow argued that when unemployment is high,there is

A) upward pressures on wages and prices.
B) upward pressures on wages and downward pressures on prices.
C) upward pressures on prices and downward pressures on wages.
D) downward pressures on wages and prices.

Question 80

If the central bank increases the money supply,in the short run,output

A) rises so unemployment rises.
B) rises so unemployment falls.
C) falls so unemployment rises.
D) falls so unemployment falls.