The short-run tradeoff between Inflation and unemployment
If the short-run Phillips curve were stable, which of the following would be unusual
an increase in inflation and a decrease in output.
Most economists believe that a tradeoff between inflation and unemployment exists
only in the short run.
A favorable supply shock causes output to
rise. To counter this a central bank would decrease the money supply.
The natural rate of unemployment
Does not depend on the rate at which the fed increases the money supply.
Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve
Eric gets fewer job offers.
A politician blames the federal reserve for being soft on unemployment and claims that a permanently higher money supply growth rate will lead to permanent reduction in the unemployment rate. The politicians agrument is
inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.
Suppose that the money supply decreases. In the short run, this increases prices according to
neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
If the minimum wage increased, then at any given rate of inflation
output would be lower and unemployment would be higher.
If a central bank decreases the money supply, then
prices and output fall and unemployment rises.
There is a temporary adverse supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would
raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right.
An adverse supply shock shifts the short-run Phillips curve to the
right. This means the unemployment rate is higher at each inflation rate.
IF the central bank increases the money supply, in the short run, output
rises so unemployment falls.
According to the long-run Phillips curve, in the long run monetary policy influences
the inflation rate but not the unemployment rate.
Suppose the fed increased the growth rate of the money supply. Which of the following would be higher in the long run
the inflation rate, but not the natural rate of unemployment
Suppose that the money supply increases. In the short run this decreases unemployment according to
both the short-run Phillips curve and the aggregate demand and aggregate supply model.
In response to the financial crisis of 2007 policymakers used
expansionary monetary policy and expansionary fiscal policy.
If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has
higher unemployment and lower output.
Typical estimates of the sacrifice ratio suggest that a one-percentage-point reduction in the inflation rate requires
a sacrifice of 5 percent of annual output.
A policy change that changes the natural rate of unemployment changes
both the long-run Phillips curve and the long-run aggregate supply curve.
a policy that raised the natural rate of unemployment would shift
both the short-run and the long-run Phillips curves to the right
In 1980 the U.S. economy had an inflation rate of
more than 9 percent and an unemployment of about 7 percent.
An adverse supply shock will cause output
to fall and prices to rise.