Chapter 35 Pop Quiz

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.

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

the sum of the unemployment rate and the inflation rate

The original Phillips curve illustrates

the trade-off between inflation and unemployment

Along a short-run Phillips curve,

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

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

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

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.