Question 1

According to the long-run Phillips curve, if the Fed increases the growth rate of the money supply, what happens to the inflation rate and the unemployment rate in the long run?

Accepted Answer

The answer of According to the long-run Phillips curve, if...

Question 2

According to the Phillips curve, which fiscal policies can be used to reduce unemployment in the short run?

Accepted Answer

The answer of According to the Phillips curve, which fiscal...

Question 3

​According to the Phillips curve, policymakers can reduce both inflation and unemployment by increasing the money supply.

Accepted Answer

The Phillips curve suggests a trade-off between inflation and unemployment, implying that reducing inflation typically results in higher unemployment, and vice versa, not that increasing the money supply can reduce both simultaneously.

Question 4

A central bank can reduce inflation by reducing money supply growth, but it necessarily does so at the cost of permanently raising the unemployment rate.

Accepted Answer

While reducing money supply growth can help control inflation, it does not necessarily result in a permanently higher unemployment rate. The short-term effect might see an increase in unemployment due to lower spending and investment, but over time, the economy can adjust, and unemployment can return to its natural rate.

Question 5

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action will raise inflation and lower unemployment.

Accepted Answer

Increasing the money supply in response to an adverse supply shock can lower unemployment in the short run due to the stimulative effect on the economy, but it also raises inflation because more money chases the same or fewer goods and services.

Question 6

As the aggregate demand curve shifts to the right, what happens to the price level and output? What do these changes imply happens to the inflation rate and the unemployment rate?

Accepted Answer

The answer of As the aggregate demand curve shifts to...

Question 7

​In a famous article published in 1958, A.W. Phillips 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.

Accepted Answer

A.W. Phillips published an article in 1958 where he demonstrated a negative relationship between wage inflation and unemployment in the United Kingdom, which became known as the Phillips Curve.

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

The answer of If asset prices fall and inflation expectations...

Question 10

If the Fed reduces inflation by 2 percentage points and this results in a 6 percentage-point increase in unemployment, then the sacrifice ratio is equal to 3.

Accepted Answer

The answer of If the Fed reduces inflation by 2...

Question 11

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

Accepted Answer

A low sacrifice ratio indicates that only a small amount of economic output is lost for each unit reduction in inflation, making a central bank more willing to reduce the inflation rate because the cost in terms of lost output is lower.

Question 12

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

Accepted Answer

The answer of The sacrifice ratio of the Volcker disinflation...

Question 13

​If expected inflation increases, the short-run Phillips curve will shift to the left so that inflation will be higher at any given unemployment rate.

Accepted Answer

If expected inflation increases, the short-run Phillips curve shifts to the right, indicating that for any given level of unemployment, the inflation rate will be higher.

Question 14

Suppose that businesses become less optimistic about the future. Assuming no change in inflation expectations, how would the effects of this shock be shown on the Phillips curve diagram and what would happen to inflation and unemployment?

Accepted Answer

The answer of Suppose that businesses become less optimistic about...

Question 15

Government expenditures increase. What happens to the price level and output? Explain how the change in the price level and output effect the inflation rate and the unemployment rate.

Accepted Answer

The answer of Government expenditures increase. What happens to the...

Question 16

If consumer confidence rises and inflation expectations remain unchanged, what happens to inflation and unemployment? Defend your answer.

Accepted Answer

The answer of If consumer confidence rises and inflation expectations...

Question 17

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

Accepted Answer

In the early 1980s, the Federal Reserve, under Chairman Paul Volcker, implemented a tight monetary policy to combat high inflation, significantly increasing interest rates. This policy successfully reduced the inflation rate from double digits in the late 1970s and early 1980s to around 4% by the mid-1980s.

Question 18

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

Accepted Answer

A decrease in the growth rate of the money supply would typically lead to lower inflation expectations, which could shift the short-run Phillips curve to the left, indicating lower inflation at each level of unemployment, not to the right.

Question 19

U.S. net exports fall due to recessions in foreign countries.
A. According to the aggregate demand and supply model, what happens to the price level and output in the short run?
B. According to the short-run Phillips curve what happens to inflation and unemployment in the short run?
C. If the Fed wanted to reverse the effects of this shock on output, what should it do?

Accepted Answer

The answer of U.S. net exports fall due to recessions...

Question 20

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.

Accepted Answer

Rational expectations theory posits that individuals form their expectations about the future based on all available information, including anticipated policy changes. If policymakers fail to account for how people adjust their inflation expectations in response to policy actions, they might overestimate the sacrifice ratio, which measures the cost of reducing inflation in terms of lost output.

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