Chapter 17 ECON 202

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

both the unemployment rate and the inflation rate would be lower.

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

decreased the money supply.

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

both the short-run Phillips curve and the aggregate demand and aggregate supply model.

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

in the short run, but not the long run

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

low, so there was upward pressure on wages and prices.

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

right. This means the unemployment rate is higher at each inflation rate.

Milton Friedman argued that the Fed's control over the money supply could be used to peg

the level or growth rate of a nominal variable, but not the level or growth rate of a real variable.

Suppose policy makers take action that cause a contraction of aggregate demand. Which of the following is a short-run consequence of this contraction?

-The inflation rate decreases -The level of output decreases -The unemployment rate increases

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as

0.

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 2012, and those two points correspond to points B and C, respectively, on the left-hand graph. Then it is apparent that the price index equaled

100 in 2011

If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

16 percent of annual output

If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points and unemployment rise 3 percentage points for six months, the sacrifice ratio is

2.

Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, an increase in the money supply growth rate moves the economy to

B and 2

Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, an increase in taxes moves the economy to

D and 3

Suppose that as a result of a stock market boom, consumers become less concerned about saving for retirement and increase their current consumption expenditures. Which of the following would you expect to occur as a result of this change?

In the short run, unemployment will decrease and inflation will rise.

How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?

It would shift along the long-run Phillips curve left

. One determinant of the natural rate of unemployment is the

Minimum wage rate

Suppose OPEC is unable to come to an agreement regarding oil production and as a result the price of oil drops. Which of the following would you expect to occur as a result of this favorable supply shock?

The short-run Phillips curve will shift to the left and the unemployment rate will decrease.

Which of the following is not correct?

Unemployment can be changed only by the use of government policy.

One way to express the classical idea of monetary neutrality is to draw

a vertical long-run Phillips curve

Which of the following is an example of an adverse supply shock?

a worldwide drought

Friedman and Phelps argued that

any change in unemployment created by making aggregate demand increase more rapidly is temporary because people eventually revise their inflation expectations.

In the late 1960s, economist Edmund Phelps published a paper that

argued that there was no long-run tradeoff between inflation and unemployment.

A favorable supply shock will cause inflation to

fall and shift the short-run Phillips curve left.

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

falls and unemployment rises.

According to the Phillips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is

higher in the short-run only.

Consider two countries: Eastland and Westland. Eastland's long-run Phillips curve sits further to the right than does Westland's long-run Phillips curve. Eastland and Westland are identical in all other ways. In particular, they have the same money supply growth rates. In the long run, compared to Westland, which of the following will we observe in Eastland?

higher unemployment and the same rate of inflation.

A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is

inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

A central bank that accommodates an aggregate supply shock

increases the money supply, making the inflation rate rise.

If the Federal Reserve increases the growth rate of the money supply, in the long run

inflation is higher while the unemployment rate is unchanged.

Which of the following depends primarily on the growth rate of the money supply?

inflation, but not the natural rate of employment

An adverse supply shock will shift short-run aggregate supply

left, making prices rise.

Suppose the central bank pursues an unexpectedly tight monetary policy. In the short-run the effects of this are shown by

moving to the right along the short-run Phillips curve.

Refer to Figure 35-1. What is measured along the horizontal axis of the left-hand graph?

output

Refer to Figure 35-1. Assuming the price level in the previous year was 100, point F on the right-hand graph corresponds to

point B on the left-hand graph

. In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve, in the short run this change should have

raised inflation and reduced unemployment.

In the long run, an increase in the money supply growth rate

raises expected inflation so the short-run Phillips curve shifts right.

Over the long run the Volcker disinflation

shifted in the short-run, but not the long-run Phillips curve left

In 1979, Fed chair Paul Volcker decided to pursue a policy

that would lead to disinflation.

Refer to Figure 35-1. What is measured along the vertical axis of the right-hand graph?

the inflation rate

On a given short-run Phillips curve which of the following is not held constant?

the level of GDP

. If more firms chose to pay efficiency wages, which of the following would shift to the right?

the long-run Phillips curve but not the long-run aggregate supply curve

Refer to Monetary Policy in Flosserland. 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

unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.

If a central bank increases the money supply growth rate, then in the short run

unemployment falls. In the long run the short-run Phillips curve shifts right.

As aggregate demand shifts left along the short-run aggregate supply curve,

unemployment is higher and inflation is lower

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures. Then

unemployment rises, but it would have risen less if people had been expecting 25% inflation.

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

unemployment rises. If the central bank tries to counter this increase, inflation rises.

Economist AW Phillips found a negative correlation between

wage inflation and unemployment.

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

will having rising unemployment for a while, but then return to the natural rate of unemployment.

A policy that raised the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the right.

The short-run Phillips curve intersects the long-run Phillips curve where

-the actual rate of inflation equals the expected rate of inflation. -the actual rate of employment equals the natural rate of unemployment

A favorable supply shock causes output to

rise. To counter this a central bank would decrease the money supply.