Unit 6 macro

If the economy begins at the natural unemployment rate and the fed surprises people by slowing the hw inflation rate more than expected there is a

Movement downward along the short run Phillips curve

Changes in natural unemployment rate

NUR increases lrpc and srpc increases NUR decreases lrpc and srpc decrease

Shifts in LRPC AND SRPC

NUR increases: LRPC & SRPC Increases NUR decreases: LRPC & SRPC decrease

According to _, when real gdp is _ percentage points greater than potential gdp, the unemployment rate is one percentage point _ the natural unemployment rate

Okuns law Two Below

why bother with the phillips curve?

1. Focuses directly on inflation rate and unemployment rate 2. Isn't a stable tradeoff but more than AS

If the natural unemployment rate is 5 percent and the actual unemployment is 3 percent then Okuns law concludes that real gdp is

4 percent greater than potential gdp

Short Run Phillips Curve

A curve that shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant

In the short run a decrease in aggregate demand will lead to

A decrease in the price level and an increase in the unemployment rate

What can policy do to lower the expected inflation rate?

A surprise inflation & a credible announced inflation reduction.

what is the short run phillips curve another way of looking at?

Aggregate supply

In the long the inflation rate

Can take on any value

The natural rate hypothesis asserts

Changes in the unemployment rate from changes in the inflation rate are temporary

What determines the expected inflation rate?

Data, science, and a forecast of feds actions.

Okun's Law

For each percentage point that the unemployment rate is above the natural unemployment rate, real GDP is 2 percentage points below Potential GDP.

Okun's law

For each percentage point that the unemployment rate is above the natural unemployment rate, real GDP is 2 percentage points below potential gdp.

Shift aggregate demand

Future income increases it increases Future inflation increases it increases Interest rates increase it decreases Gov spending increases it increases Foreign income increases it increases

According to the AS AD model when real gdp is less than potential gdp the unemployment rate is definetly

Greater than the the natural unemployment rate

According to the natural rate hypothesis if the economy begins at full employment with an unemployment rate of 5 percent and then the inflation rate increases from 2 percent to 4 percent then the economy will

Have lower unemployment but then return to its natural rate with an inflation rate of 4 percent

shifts in aggregate supply

Increase in PGDP increase and decrease in PGDP decreases Money wage rate increases it increases money wage rate decreases it decreases Price of resources increases it decreases price of resources decreases it increases

What does the Phillips curve a trade off of?

Inflation and unemployment

Why bother with the Phillips curve?

It focuses directly on inflation and unemployment, and it isn't a stable trade off but more than AS.

What shirts the long run Phillips curve?

More people are hospitalized so maybe there is some kind of plague and more people go into the military so maybe a war breaks out.

What does not change the natural unemployment rate

Quantity of money

A surprise reduction of inflation will come at he expense of

Recession

Rational expectation

The forecast that results from the use of all the relevant data and economic science.

Expected Inflation Rate

The inflation rate that people forecast and use to set the money wage rate and many other prices.

Expected inflation rate

The inflation rate that people forecast and use to set the money wage rate and other prices.

Natural rate hypothesis

The proposition that when the inflation rate changes temporarily and eventually it returns to the natural unemployment rate.

Natural Rate Hypothesis

The proposition that when the inflation rate changes temporarily and eventually returns to the natural unemployment rate.

A credible announced inflation reduction is one that

The public is told about before policy changes have occurred and that is believed by the public

Long Run Phillips Curve

The vertical line that shows the relationship between inflation and unemployment when the economy is at all employment.

Long run Phillips curve

The vertical line that shows the relationship between inflation and unemployment when the economy is at full employment.

What does the slope of the Srpc indicate about the trade off between inflation and unemployment

There is an opposite movement

Inflation rate=

Trend money growth rate-trend real gdp growth rate

The short run Phillips curve shows only a short run trade off between the unemployment rate and the inflation rate because in the long run

Unemployment rate returns to the natural unemployment rate and so there is no long run traded between the inflation rate and the unemployment rate

During expansion unemployment... and inflation...

Unemployment: decreases Inflation: increases

During recession unemployment...and inflation...

Unemployment: increases Inflation: decreases

The long run curve is

Vertical

Have Changes in the Natural Unemployment Rate Changed the Tradeoff

YES!

Have changes in the natural unemployment rate changed the trade off?

Yes

What shift the LRPC

increase in expected inflation rate

what does a decrease in AD do to the long run phillips curve

has the same movement down along it