Chapter 17 - The Short-Run trade off between Inflation and Unemployment

What is the equation for the short-run Phillips curve?

Unemployment rate = Natural rate of employment (actual inflation - expected inflation)

What is the Phillips Curve?

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

What is a supply shock?

an event that directly alters firms' costs and prices, shifting the economy's aggregate supply curve and thus the Phillips curve. Increases in prices of oil,

T or F: When actual inflation exceeds expected inflation, unemployment exceeds the natural state

F:

What triggers a shift in the Phillips curve?

Things that affect the Aggregate supply curve. Shifts in AS to the right shift Phillips to the left

What is the Greenspan era?

1987 - 2005 a period of relatively mild fluctuations in inflation and unemployment

If the sacrifice ratio is four, what reduction of output is required to reduce inflation from 9 to 5 percent?

4 percent * 4/percent = 16 percent reduction

What is the typical estimate of the sacrifice ratio?

5. Thus, for each percentage point that inflation is reduced, 5 percent of annual output must be sacrificed in the transition.

What affect does a decrease in the minimum wage have on the Phillips curve? (lowers the natural rate)

Both the long term and short term Phillips curve shifts left as unemployment will drop.

What moves the economy to a point on the Phillip's curve with higher unemployment and lower inflation?

Decreases in money supply, tax increases, decreased gov't spending. Anything that shifts the AD curve to the left

How does the Phillips curve change over the long run?

In the long run, the Phillips curve is vertical, reinforcing the classical monetary neutrality that states that monetary policy influences nominal variable but not real ones in the long run.

What shifts the LONG RUN Phillips curve?

Increases in minimum wage shift it to the right (increases unemployment)

What moves the economy to a point on the Phillip's curve with lower unemployment and higher inflation?

Increases in money supply, tax cuts, increased gov't spending. Anything that shifts the AD curve to the rights

How did the Phillips curve look during the 2006-2009 financial crisis?

Low inflation with high unemployment. Downward sloping curve for that short run period.

What affect does a decrease in government spending have on the Phillips curve?

Moves down the short run curve

What affect does an increase in money supply have on the Phillips curve?

Moves up along the curve as prices have increased leading to increased inflation

How does a negative supply shock affect the Phillips curve?

Shift right as the inflation rate increases for every level of unemployment

What affect does a decrease in aggregate demand have on the Phillips curve?

Shifts it down the curve - lower prices

How does a positive supply shock affect the Phillips curve?

Shifts left as the inflation rate decreases for every level of unemployment

What effect does an increase in expected inflation have on the Phillips Curve?

Shifts the short run Phillips curve to the right.

What is zero bound?

The fact that nominal interest rates cannot go below 0

What is expected inflation?

The level of how much people expect the overall price level to change. This affects nominal wages which affects the short run aggregate supply curve and is the main reason why the Phillips curve slopes downward in the short run

What is disinflation?

The lowering of the inflation rate. (not negative inflation which is deflation)

What is the sacrifice ratio?

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

What is the misery index?

The sum of the inflation and unemployment rate

What are rational expectations?

The theory that people optimally use all the information they have, including information about government policies, when forecasting the future. Encourages government to set the expectation by having policies that control inflation in place.

What triggers movement along the Phillips curve?

Things that affect the Aggregate demand curve. Shifts in the AD to the right move upwards on the Phillips curve

What is the natural-rate hypothesis?

the claim that unemployment eventually returns to is normal, or natural, rate, regardless of the rate of inflation.