Question 1

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

Accepted Answer

Proponents of rational expectations argue that when people have the ability to revise their expectations based on new information, the cost of reducing inflation is lower than previously estimated. This means that estimates of the sacrifice ratio, which measures the short-term cost of reducing inflation, were too high when they did not account for rational expectations.

Question 2

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Change the expected inflation to 3 percent and draw the new Phillips curve. How did it change?

Accepted Answer

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

Question 3

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

Accepted Answer

A policy change that reduces the natural rate of unemployment would shift the long-run aggregate-supply curve to the right, indicating an increase in potential output. It would shift the long-run Phillips curve to the left, reflecting a lower natural rate of unemployment at any given rate of inflation, but the direction of the shift for the aggregate-supply curve and the Phillips curve is not the same.

Question 4

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-supply...

Question 5

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

Accepted Answer

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

Question 6

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by 1 percentage point.

Accepted Answer

The sacrifice ratio measures the loss in output (not the increase in unemployment) associated with reducing inflation by 1 percentage point.

Question 7

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?

Accepted Answer

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

Question 8

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve (that is, to increase inflation and reduce unemployment)? Were they right or wrong?

Accepted Answer

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

Question 9

How could we transform the AD-AS model such that, instead of the price level and output it would show the relationship between the inflation rate (ð) and the rate of output growth (g)?

Accepted Answer

The answer of How could we transform the AD-AS model...

Question 10

Suppose that the Bank of Canada unexpectedly decreases the money supply. What will happen to unemployment in the short run? What will happen to unemployment in the long run?

Accepted Answer

The answer of Suppose that the Bank of Canada unexpectedly...

Question 11

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 12

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Draw the long-run and short-run Phillips curves. What is the inflation rate corresponding to the intersection of the two curves?

Accepted Answer

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

Question 13

Some economists argue that simply and 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 reform, people expect that the government will soon start printing more money again to pay for its expenditures, and the promise to fight inflation will not be credible. Explain the importance of an inflation-reduction policy that is announced ahead of time and is credible.

Accepted Answer

The answer of Some economists argue that simply and suddenly...

Question 14

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

Accepted Answer

Monetary policy primarily focuses on controlling inflation and stabilizing the economy. It is not directly aimed at reducing the natural rate of unemployment, which is determined by structural and demographic factors. However, other types of policies such as education and training programs, labor market reforms, and investment in infrastructure can potentially reduce the natural rate of unemployment.

Question 15

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Describe the process of adjustment when the expected inflation rate changes from 2 percent to 3 percent.

Accepted Answer

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

Question 16

Some countries have had high inflation rates for a long time and other countries have had low inflation rates for a long time. Yet in some of the high-inflation countries, the unemployment rate is not much different or even higher than in the low-inflation countries. Explain how these observations can be consistent with the Phillips curve.

Accepted Answer

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

Question 17

Some countries have inflation in excess of 20 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 20 percent to 8 percent?

Accepted Answer

The answer of Some countries have inflation in excess of...

Question 18

Economists generally agree that there is a short-run Phillips curve. However, some economists believe that the short-run Phillips curve is steep and that inflation expectations adjust quickly so the long run is short-lived. What do such beliefs imply about the benefits of using policy to reduce unemployment? What do such beliefs imply about the costs of using policy to reduce inflation?

Accepted Answer

The answer of Economists generally agree that there is a...

Question 19

Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.

Accepted Answer

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

Question 20

Discuss the advantages and disadvantages of drawing the AD-AS model in terms of inflation (ð) and rate of growth (g).

Accepted Answer

The answer of Discuss the advantages and disadvantages of drawing...

Quiz 17: The Short-Run Tradeoff Between Inflation and Unemployment

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

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Change the expected inflation to 3 percent and draw the new Phillips curve. How did it change?

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

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

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

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by 1 percentage point.

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?

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve (that is, to increase inflation and reduce unemployment)? Were they right or wrong?

How could we transform the AD-AS model such that, instead of the price level and output it would show the relationship between the inflation rate (ð) and the rate of output growth (g)?

Suppose that the Bank of Canada unexpectedly decreases the money supply. What will happen to unemployment in the short run? What will happen to unemployment in the long run?

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

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Draw the long-run and short-run Phillips curves. What is the inflation rate corresponding to the intersection of the two curves?

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

Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Describe the process of adjustment when the expected inflation rate changes from 2 percent to 3 percent.

Some countries have inflation in excess of 20 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 20 percent to 8 percent?

Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.

Discuss the advantages and disadvantages of drawing the AD-AS model in terms of inflation (ð) and rate of growth (g).