Macro Ch. 17

monetary policy has __________ impact on LR Phillips curve

no

NAIRU

non accelerating inflation rate of unemployment = natural rate of unemployment = has no tendency to increase or decrease

if expected inflation falls, the long run Phillips curve will

not be affected

if actual inflation is lower than expected, wages will be

higher than expected, firms hire fewer workers than expected, and unemployment rates rises

Short run tradeoff between unemployment and inflation

higher unemployment is usually accompanied by lower inflation, and vice versa

an increase in expected inflation rate will shift short run Phillips curve

to the right

All other factors held constant, increased growth in aggregate demand will

A) increase inflation. B) reduce unemployment. C) move the economy to a higher point on the short-run Phillips curve.

where does short run Phillips curve intersect long run Phillips curve?

at the point where actual inflation is equal to expected inflation

short run Phillips curve will not shift unless there is a

change in inflation expectations

when unemployment is above its natural rate, the inflation rate will eventually

decrease

weak increase in AD causes

low inflation, high unemployment

increased AD will

increase inflation, reduce unemployment, move economy to a higher point on the SR Phillips curve

in LR, Fed can affect __________ but not ___________

inflation rate; unemployment rate

expected rates are found along

long run Phillips curve

if actual inflation is higher than expected, wages will be

lower than expected, firms hire more workers than planned, and unemployment rates fall

unemployment always returns to _______ _________, regardless of inflation rate.

natural rate

if the long run aggregate supply curve is vertical

the trade-off between unemployment and inflation cannot be permanent

a decrease in AD will move economy

to a lower point on the SR Phillips curve

key to understanding the short run trade off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is _________________ by both workers and firms

unexpected

If Fed uses contractionary monetary policy to fight inflation,

AD curve would shift left and economy's equilibrium would move down SR Phillips curve. RGDP would fall and inflation would be reduced (at cost of high unemployment)

If Fed uses expansionary monetary policy to fight high unemployment,

AD curve would shift right and economy's equilibrium would move up the SR Phillips curve. RGDP would increase and unemployment rate would fall (at cost of high inflation!)

Phillips Curve

a curve showing the short run relationship between unemployment rate and inflation rate

strong increase in AD causes

high inflation, low unemployment