chapter 22 the short-run trade-off between inflation and unemployment

what happens if there is an adverse shock to aggregate supply

1. AS shifts to the left 2. output lowers 3. price level raises 4. short run PC shifts to the right

what does a a disinflationary monetary policy in SR and LR look like?

1. move downward along the SR PC 2. mark the new inflation on the LR curve

If unemployment is 6 percent and inflation is 5 percent, what is the value of the so-called misery index?

11 percent.

Use the model of aggregate demand and aggregate supply to describe why the short-run Phillips curve is negatively sloped.

An increase in aggregate demand increases prices and output along the short-run aggregate-supply curve, which reduces unemployment. Prices have increased, and unemployment has decreased.

Use the model of aggregate demand and aggregate supply to describe why the long-run Phillips curve is vertical.

An increase in aggregate demand increases prices, but output remains at the natural level due to a vertical long-run aggregate-supply curve. Prices have increased, but unemployment remains at the natural rate.

misery index

The sum of inflation and unemployment

The natural-rate hypothesis argues that unemployment is always above the natural rate. unemployment is always below the natural rate. unemployment is always equal to the natural rate. in the long run, the unemployment rate returns to the natural rate, regardless of inflation.

in the long run, the unemployment rate returns to the natural rate, regardless of inflation.

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long-run Phillips curve is positively sloped. is negatively sloped. is vertical. has a slope that is determined by how fast people adjust their price expectations.

is vertical.

years with high inflation are associated with high or low unemployment

low

expected inflation

measures how much people

the long run phillips curve should be vertical at the ____

natural rate of unemployment

the Fed's ability to create expected inflation by increasing money supply exists in the short run long run or both

short run

sacrifice ratio

the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point

When actual inflation exceeds expected inflation, unemployment is greater than the natural rate of unemployment. unemployment is less than the natural rate of unemployment. unemployment is equal to the natural rate of unemployment. people will reduce their expectations of inflation in the future.

unemployment is less than the natural rate of unemployment.

what does the long run phillips curve look like?

vertical line

phillips curve

a curve that shows the short-run trade-off between inflation and unemployment

The misery index, which some commentators suggest measures the health of the economy, is the sum of the growth rate of output and the inflation rate. the sum of the unemployment rate and the inflation rate. the sum of the Dow Jones Industrial Average and the federal funds rate. the sum of the natural rate of unemployment and the actual rate of unemployment.

the sum of the unemployment rate and the inflation rate.

rational expectations

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future

The original Phillips curve illustrates the trade-off between inflation and unemployment. the positive relationship between inflation and unemployment. the trade-off between output and unemployment. the positive relationship between output and unemployment.

the trade-off between inflation and unemployment.

Along a short-run Phillips curve, a higher rate of growth in output is associated with a lower unemployment rate. a higher rate of growth in output is associated with a higher unemployment rate. a higher rate of inflation is associated with a lower unemployment rate. a higher rate of inflation is associated with a higher unemployment rate.

a higher rate of inflation is associated with a lower unemployment rate.

disinflation

a reduction in the rate of inflation

supply shock

an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve

why are inflation and unemployment related in the short run?

an increase in aggregate demand temporarily increases inflation and output while it lowers unemployment

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and decreases growth. decreases inflation. increases unemployment. decreases unemployment.

decreases unemployment.

when expected inflation changes, the SR PC does what and what does this mean (lol sorry idk how to ask)

the SR PC shifts thus there can be no stable SR PC

natural rate hypothesis

the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

stagflation

the combination of inflation and falling aggregate output