Chapter 35

The phillips curve illustrates the positive relationship between inflation and unemployment

F the Phillips curve illustrates the negative relationship between inflation and unemployment

If inflation is 4 percent and unemployment is 6 percent, the misery index is 2 percent.

F the misery index is 10 percent

A decrease in unemployment benefits reduces the natural rate of unemployment and shifts the long-run Phillips curve to the right.

False. it shifts the long-run Phillips curve to the left.

If the sacrifice ratio is four, a reduction of inflation from 9 percent to 5 percent requires a reduction in output of 8 percent.

False. output must be reduced by 4X4%= 16%

Misery Index

The sum of the unemployment and inflation rates.

natural rate hypothesis

The theory that unemployment returns to its natural rate, regardless of inflation

An adverse supply shock, such as an increase in the price of imported oil, shifts the Phillips curve upward and makes the inflation-unemployment trade-off less favorable.

True

An increase in aggregate demand temporarily reduces unemployment, but after people raise their expectations of inflation, unemployment returns to the natural rate.

True

An increase in price expectations shifts the Phillips curve upward and makes the inflation-unemployment trade-off less favorable.

True

The natural-rate hypothesis suggests that, in the long run, unemployment returns to its natural rate, regardless of inflation.

True

A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.

false. a sudden monetary contraction moves the economy down a short-run Phillips curve, increasing unemployment and reducing inflation.

When actual inflation exceeds expected inflation, unemployment exceeds the natural rate.

false. when actual inflation exceeds expected inflation, unemployment is below the natural rate.

The natural-rate hypothesis argues that

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 vertical

A decrease in the price of foreign oil

shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable.

An increase in expected inflation

shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable.

According to the Phillips curve, in the short run, if policymakers choose an expansionary policy to lower the rate of unemployment,

the economy will experience an increase in inflation

sacrifice ratio

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

If people have rational expectations, an announced monetary contraction by the Fed that is credible could reduce inflation with little or no increase in unemployment

true

In the long run, the unemployment rate is independent of inflation, and the Phillips curve is vertical at the natural rate of unemployment

true

In the short run, an increase in aggregate demand increases prices and output and decreases unemployment.

true

When actual inflation exceeds expected inflation,

unemployment is less than the natural rate of unemployment.

If the sacrifice ratio is five, a reduction in inflation from 7 percent to 3 percent would require

a reduction in output of 20 percent.

Disinflation

a reduction in the rate of inflation

The misery index, which some commentators suggest measures the health of the economy, is

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

trade off between inflation and unemployment

When unemployment is below the natural rate, the labor market is unusually tight, putting pressure on wages and prices to rise.

True

Phillips Curve

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

Along a short-run Phillips curve,

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

supply shock

an event that shifts the short-run aggregate supply curve

Which of the following would shift the long-run Phillips curve to the right?

an increase in the minimum wage

If the Fed were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be

an increase in the rate of inflation.

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 unemployment.

An increase in the money supply increases inflation and permanently decreases unemployment

false. an increase in the money supply may temporarily decrease unemployment

If people have rational expectations, a monetary policy contraction that is announced and is credible could

reduce inflation with little or no increase in unemployment.

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates