Chapter 17 Problems
The long-run Phillips curve would shift to the right if
effective job-training programs were eliminated, but not if the money supply growth rate increased. To shift the long-run Phillips curve, policymakers should look to policies that change the functioning of the labor market. Eliminating effective job-training programs would increase the natural rate of unemployment and shift the long-run Phillips curve to the right. Monetary policy does not shift the long-run Phillips curve.
Policymakers prefer both low inflation and low unemployment. The historical data summarized by the Phillips curve indicate that this combination is:
impossible According to Samuelson and Solow, policymakers face a trade-off between inflation and unemployment. Therefore, the combination is low inflation and low unemployment is impossible.
The number of percentage points annual output falls for each percentage point reduction in inflation is the
sacrifice ratio. The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities does not move closer to its pre-shock value as a result?
the price level but not output An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise. The price level moves even farther away from its pre-shock value.
Refer to the Figure. What is measured along the horizontal axis of the left-hand graph?
the quantity of output The left-hand graph is the model of aggregate demand and aggregate supply, which shows the quantity of output on the horizontal axis.
Which of the following is not associated with an adverse supply shock?
the short-run aggregate-supply curve shifts right An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
According to the natural-rate hypothesis, the expansionary policies of the 1960s would result in ____ in the 1970s.
a return to higher unemployment The natural-rate hypothesis claims that unemployment eventually returns to its natural rate regardless of the rate of inflation.
Which of the following is an example of an adverse supply shock?
a worldwide blight that damages grain crops An adverse supply shock is an event that directly raises firms' costs of production and thus the prices they charge. A worldwide blight raises food costs throughout many economies.
In the long run, which of the following would shift the long-run Phillips curve to the left?
an increase in right-to-work laws that limit collective bargaining To reduce the natural rate of unemployment and shift the long-run Phillips curve to the left, policymakers should look to policies that improve the functioning of the labor market, such as right-to-work laws that limit collective bargaining.
The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right when there is a(n)
adverse supply shock. An adverse supply shock shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
Which of the following did not play a role in depressing aggregate demand in 2001?
collapse of housing prices In 2001, the end of the dot-com stock market bubble, the 9/11 terrorist attacks, and corporate accounting scandals all depressed aggregate demand. The collapse of housing prices set off the financial crisis of 2008-2009.
Slowing a car down is like ________, whereas putting the car into reverse gear is like ________.
disinflation; deflation Disinflation is a reduction in the rate of inflation, and is analogous to a car slowing down and reducing its rate of speed. Deflation, on the other hand, is a reduction in the price level and is analogous to a car going in reverse (with a rate of speed).
Samuelson and Solow argued that there is downward pressure on wages and prices when unemployment is
high Samuelson and Solow reasoned that low unemployment was associated with high aggregate demand, which in turn put upward pressure on wages and prices throughout the economy. High unemployment had the opposite effect, downward pressure on wages and prices.
The Federal Reserve might move unemployment lower in the short run but not the long run by ________ the rate at which it increases the money supply.
increasing Policymakers can pursue expansionary monetary policy to achieve lower unemployment for a while, but eventually unemployment returns to its natural rate.
According to the theory of rational expectations, people ____
optimally use all the information they have when forecasting the future. Rational expectations is the theory that people optimally use all of the information they have, including information about government policies, when forecasting the future.
Refer to the Figure. Stagflation would be represented by a movement of the economy from
point A to point B, and at the same time a movement from point C to point D. . Stagflation is the combination of falling output, rising unemployment, and rising prices. These conditions are represented by movements from point A to point B and from point C to point D.
The Greenspan era can be characterized as being one that ____
the Federal Reserve was careful to avoid the policy mistakes of the 1960s. Greenspan was determined not to repeat past policies that caused increases in aggregate demand that led to inflation. He used monetary policy throughout his terms to focus on keeping inflation in check.
If there is a decrease in the price of oil, then
unemployment falls. If the central bank tries to counter this decrease, inflation falls. A decrease in the price of oil is a favorable supply shock that causes unemployment to fall and inflation to rise. If the central bank tries to counter the decrease in unemployment, inflation will fall.
In 2001, Congress and President Bush instituted a change in tax policy. According to the short-run Phillips curve, this change should have raised inflation and reduced unemployment. The change in tax policy must have been
A cut. A tax cut causes aggregate demand to shift to the right. Rightward shifts of aggregate demand move the economy to a point on the Phillips curve with higher inflation and lower unemployment.
An increase in government expenditures serves as an example of an adverse supply shock.
False An increase in government expenditures shifts the aggregate-demand curve not the aggregate-supply curve.
Suppose that the money supply increases. In the short run, this increases prices according to
both the short-run Phillips curve and the aggregate demand and aggregate supply model. An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand move the economy to a point on the Phillips curve with higher inflation. The aggregate demand and aggregate supply model produces a similar result.
In the United States, expected inflation rose substantially during the
1970s. In the United States during the 1970s, expected inflation rose substantially.
In the short run, an adverse supply shock would cause the price level to
rise and output to fall. By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise and output to fall.
Fiscal policy can be used to move the economy along the short-run Phillips curve.
True Because fiscal policy can shift the aggregate-demand curve, it can move an economy along the short-run Phillips curve.
The sacrifice ratio of the Volcker disinflation was smaller than previous estimates had predicted.
True Most estimates of the sacrifice ratio based on the Volcker disinflation are smaller than estimates that had been obtained from previous data.
A reduction in the rate of inflation is
disinflation. The inflation rate is percentage change in the prices level in an economy. When the inflation rate is positive, like 3%, this means the price level in the economy is rising. When the inflation rate declines, from 3% to 1% for example, this is known as disinflation. This should not be confused with deflation, which refers to a situation where there is a negative inflation rate and prices are declining.
Other things the same, a country that decides to increase inflation will
have a lower unemployment rate only in the short run. The short-run Phillips curve shows that higher inflation can lead to lower unemployment in the short run. But, as inflation expectations adjust in the long run, unemployment returns to the natural rate of unemployment.
From 2006 to 2009, aggregate demand shifted to the left because of a crisis in the
housing market. From 2006 to 2009 house prices fell by about one third, resulting in a large decline in aggregate demand.
Over the course of 2 years, if a central bank reduced inflation by 4 percentage points and that made output fall by 2 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is
1 The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 2 percent per year; the sacrifice ratio is 2 divided by 2, which is equal to 1.
The U.S. economy had an inflation rate of more than 9 percent and an unemployment rate of about 7 percent in
1980. In 1980, after two OPEC supply shocks, the U.S. economy had an inflation rate of more than 9 percent and an unemployment rate of about 7 percent.
Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is
3 Output falls by 6 percent; inflation falls by 2 percentage points. The sacrifice ratio is 6 divided by 2, which is equal to 3.
Over the course of 2 years, if the central bank reduced inflation by 1 percentage point and that made output fall by 2 percentage points each year and the unemployment rate rise from 3 percent to 5 percent, the sacrifice ratio is
4 The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 2 percent per year and inflation fell by 0.5 percent per year; the sacrifice ratio is 2 divided by 0.5, which is equal to 4.
If a central bank reduces inflation 2 percentage points and this makes output fall 5 percentage points and unemployment rise 3 percentage points for one year, the sacrifice ratio is
5/2 The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. Output fell by 5 percent and inflation fell by 2 percent; the sacrifice ratio is 5 divided by 2.
Refer to the Figure. If the economy starts at C and 1, then in the short run, an increase in aggregate demand moves the economy to
B and 2. In the left-hand graph, an increase in aggregate demand moves the economy to B in the short run, where unemployment decreases and inflation increases. Therefore, on the Phillips curve in the right-hand graph, the economy moves to 2.
Refer to the Figure. If the economy starts at C and 1, then in the short run, a decrease in taxes moves the economy to
B and 2. A tax cut shifts the aggregate-demand curve to the right. In the left-hand graph, the economy moves to B in the short run, where unemployment decreases and inflation increases. Therefore, on the Phillips curve in the right-hand graph, the economy moves to 2.
According to ________ macroeconomic theory, in the long run monetary growth affects nominal but not real variables.
Classical Classical theory states that monetary growth does not affect real variables such as output and employment; it merely alters all prices and nominal incomes proportionately.
Long-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.
False In the long run, the economy is at the natural level of output. The trade-off between unemployment and inflation occurs in the short run.
A given short-run Phillips curve shows that a decrease in the inflation rate will be accompanied by a lower unemployment rate in the short run.
False Phillips showed that years with low unemployment tend to have high inflation, and years with high unemployment tend to have low inflation.
The proliferation of Internet usage serves as an example of an adverse supply shock.
False The proliferation of Internet usage reduces firms' costs and prices and is, therefore, a favorable supply shock.
The long-run Phillips curve is not consistent with monetary neutrality implied by the classical dichotomy.
False The vertical long-run Phillips curve is one expression of the classical idea of monetary neutrality.
If output rises and unemployment falls, the central bank must have done what to the money supply?
Increased An increase in money supply causes aggregate demand to shift to the right. Rightward shifts of aggregate demand cause output to rise and move the economy to a point on the Phillips curve with lower unemployment.
Which of the following scenarios is consistent with typical estimates of the sacrifice ratio?
Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent. The typical estimate sacrifice ratio is 5.
Which of the following would we not expect if government policy moved the economy down along a given short-run Phillips curve?
Jackie gets more job offers. A move down the short-run Phillips curve means lower inflation and higher unemployment. Jackie, therefore, would get fewer job offers, not more.
Samuelson and Solow believed that policymakers could find a menu of possible economic outcomes from which to choose by using the ________ curve.
Phillips Samuelson and Solow suggested that the Phillips curve offers policymakers a menu of possible economic outcomes.
Which of the following would cause a move to the right along the short-run Phillips curve?
The central bank pursues an unexpectedly tight monetary policy. When the money supply tightens, the aggregate-demand curve shifts to the left and the economy moves along a given short-run aggregate-supply curve to a new equilibrium with lower output, higher unemployment, and lower inflation. This new short-run equilibrium can be represented a move to the right along a the short-run Phillips curve.
A negative correlation between wage inflation and unemployment was found by economist
The economist A.W. Phillips published a famous article in 1958 in which he showed a negative correlation between the rate of unemployment and the rate of inflation.
Which of the following would not tend to shorten recessions associated with anti-inflation policies by central banks?
The long-run Phillips curve shifts to the right. Monetary policy does not shift the long-run Phillips curve. Even if a central bank could shift the curve, a shift to the right would mean higher unemployment.
Which of the following is the socially optimal rate of unemployment?
The socially optimal rate of unemployment is determined by society's values and is not necessarily the natural rate or full-employment rate of unemployment nor is it zero. None of the unemployment rates listed is necessarily the socially desirable rate of unemployment.
A decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left.
True On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Therefore, a decrease in the natural rate of unemployment shifts the long-run Phillips curve to the left.
If prices and wages adjusted rapidly and producers could quickly distinguish the difference between a change in the price level and a change in the relative price of their products, then a decrease in the money supply growth rate would have at most a very short-lived effect on unemployment.
True Under the conditions described, the economy quickly back to the natural rate of unemployment after a decrease in the money supply growth rate.
A low sacrifice ratio would make a central bank more willing to reduce the inflation rate.
True With a low sacrifice ratio, if the government made a credible commitment to a policy of low inflation, the economy would reach low inflation quickly without the cost of temporarily high unemployment and low output.
A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift left.
True A decrease in the growth rate of the money supply eventually causes expected inflation to fall. The short-run Phillips curve shifts left.
Which of the following is correct?
Unemployment can be changed by the use of government policy, but other sources of change are possible. Government policy, such as changes in monetary policy and minimum-wage laws, can change unemployment in the short run. But other sources, such as fundamental changes in labor markets, can change the natural rate of unemployment in the long run.
In the equation for the short-run Phillips curve, the parameter that measures how much actual unemployment responds to unexpected inflation is
a The variable a is a parameter that measures how much unemployment responds to unexpected inflation.
Which of the following would shift the long-run Phillips curve left?
a decrease in the natural rate of unemployment A policy change that reduced the natural rate of unemployment would shift the long-run Phillips curve to the left.
Unemployment would increase and prices would decrease if
aggregate demand shifted left. Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
For much of the 1960s, data for the United States traced out a(n)
almost perfect downward-sloping Phillips curve. The data for the unemployment rate and inflation rates from 1961 to 1968 trace out an almost perfect short-run Phillips curve that slopes downward.
If money were not neutral and the long-run Phillips curve sloped downward, then
an increase in inflation would permanently reduce unemployment. If the long-run Phillips curve sloped downward, an increase in inflation would permanently reduce unemployment. Inflation and unemployment would have a permanent negative correlation.
If there is an adverse supply shock and the Federal Reserve takes action that raises inflation but lowers unemployment in the short run, the action must have been
an increase in the growth rate of the money supply. An adverse supply shock causes output to fall and prices to rise. An increase in money supply causes output to rise and prices also to rise.
Which of the following policies increases inflation and shifts the short-run Phillips curve right?
an increase in the money supply growth rate An increase in the money supply growth rate shifts the aggregate-demand curve to the right, unemployment falls below its natural rate, and actual inflation rises above expected inflation. In the long run, expected inflation rises, the short-run Phillips curve shifts to the right, and the economy ends up with higher inflation but the same level of unemployment.
Refer to the Figure. A significant worldwide drought could explain
both the shift of the aggregate-supply curve from AS1 to AS2 and the shift of the Phillips curve from PC1 to PC2. An adverse supply shock like a worldwide drought shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
If the sacrifice ratio is 2, reducing the inflation rate from 3 percent to 1 percent would
cost 4 percent of annual output. Inflation falls by 2 percent. With a sacrifice ratio of 2, output would fall by 4 percent.
If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should
decrease the money supply growth rate which raises the unemployment rate. A decrease in the money supply growth rate shifts aggregate demand to the left and raises the unemployment rate even higher.
When aggregate demand shifts leftward along the short-run aggregate-supply curve, inflation
decreases and unemployment increases. Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
Output fell, but by less than the typical estimate of the sacrifice ratio suggested, during the Volcker
disinflation. Most estimates of the sacrifice ratio based on the Volcker disinflation are smaller than estimates that had been obtained from previous data.
A key to supporting the Friedman and Phelps hypothesis regarding the short-run and long-run relationships between inflation and unemployment was the role of ____
expected inflation. The short-run supply curve is upward-sloping due to the short-run impact of unexpected price changes. However, over time, people will expect changes in inflation that will shift the short-run aggregate-supply curve back to the long-run supply curve. Thus, expected inflation is the key to establishing the return to the natural rate of unemployment in the long run
If the government cuts government expenditures, then in the short run prices
fall and unemployment rises. A cut in government expenditures causes aggregate demand to shift to the left. Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
A rightward shift in short-run aggregate supply results from a(n)
favorable supply shock. A favorable supply shock lowers firms' costs of production and shifts the short-run aggregate-supply curve to the right.
The central bank would decrease the money supply to counter rising output in response to a(n)
favorable supply shock. Having the opposite effect to an adverse supply shock, a favorable supply shock shifts the economy's short-run aggregate-supply curve right and the short-run Phillips curve left. Output rises, unemployment falls, and prices rise. If the central bank had reasons to counter these changes, they would decrease the money supply.
In the long run, after the Fed increases the money supply quickly, the inflation rate is high, but the unemployment rate remains at its normal level, the natural rate of unemployment.
in the long run if money supply growth increases. In the long run, after the Fed increases the money supply quickly, the inflation rate is high, but the unemployment rate remains at its normal level, the natural rate of unemployment.
Prime Minister Emma Bigshot urges passage of a bill to increase unemployment benefits to very generous levels in her country. She also urges her country's central bank to raise the rate at which the money supply is increasing. In the long run which, if either, of these policies will increase the unemployment rate?
increasing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing Increasing unemployment benefits would increase the long-run natural rate of unemployment. Monetary policy has no effect on the natural rate of unemployment.
If the unemployment rate is above the natural rate, then
inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left. A decrease in money supply, for example, shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left.
An increase in inflation expectations shifts the short-run Phillips curve right while the long-run Phillips curve
is not affected. Changes in inflation expectations have no effect on the long-run Phillips curve.
If inflation expectations fall, the short-run Phillips curve shifts
left. If inflation remains the same, unemployment falls. The short-run Phillips curve shifts left when inflation expectations fall. For every possible inflation rate, unemployment would be lower.
Monetary policy cannot change the natural rate of unemployment, but other government policies can. To which of the following curves does this statement apply?
long-run Phillips Monetary policymakers face a long-run Phillips curve that is vertical, representing that the unemployment rate tends toward its normal level, called the natural rate of unemployment. Although monetary policy cannot influence the natural rate of unemployment, other types of government polices can. Additional Resources
Consider two countries: Eastland and Westland. Eastland's longrun Phillips curve sits further to the right than does Westland's longrun Phillips curve. Eastland and Westland are identical in all other ways. In particular, they have the same money supply growth rates. In the long run, compared to Eastland, which of the following will we observe in Westland?
lower unemployment and the same rate of inflation On the graph of the long-run Phillips curve, the horizontal axis measures the unemployment rate, with the rate increasing to the right. Because Westland's long-run Phillips curve is to the left of Eastland's, Westland has lower unemployment. Because both countries have the same money supply growth rates, their inflation rates are the same.
In the long run, a decrease in the money supply
lowers prices and leaves unemployment unchanged. A decrease in money supply shifts the aggregate-demand curve to the left, unemployment rises above its natural rate, and actual inflation falls below expected inflation. In the long run, expected inflation falls, the short-run Phillips curve shifts to the left, and the economy ends up with lower inflation but the same level of unemployment.
Favorable supply shocks that shifted the short-run Phillips curve left and kept both inflation and unemployment low occurred in the
mid and last part of the 1990s. The mid and last part of the 1990s witnessed low inflation and unemployment. Part of the credit goes to Alan Greenspan and the Fed, but favorable supply shocks are also part of the story.
If expected inflation decreases, which of the following shifts right?
neither the long-run nor the short-run Phillips curve When expected inflation falls, firms and workers start taking lower inflation into account when setting wages and prices. The short-run Phillips curve then shifts to the left, not the right. The long-run Phillips curve does not respond to expected inflation.
In which case, if any, will inflation not remain higher after a temporary adverse supply shock?
only if the central bank does nothing If people view the rise in inflation due to the adverse supply shock as a temporary aberration, expected inflation will not change and actual inflation will not remain higher, so long as the central bank does not change the money supply growth rate.
An adverse supply shock
raises unemployment and the inflation rate. By shifting the short-run aggregate-supply curve left, an adverse supply shock causes the price level to rise, output to fall, and unemployment to rise.
The sacrifice ratio could be as small as zero according to proponents of
rational expectations theory. According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
Because people might adjust their expectations quickly if they found anti-inflation policy credible, the sacrifice ratio could be low according to proponents of
rational expectations. According to proponents of rational expectations theory, the sacrifice ratio could be zero if the government made a credible commitment to a policy of low inflation and people would be rational enough to lower their expectations of inflation immediately.
There is a temporary favorable supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would
reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. If the central bank reduces the rate at which it increases the money supply, unemployment will rise closer to its previous rate. Prices will fall and, as expected inflation falls, the short-run Phillips curve shifts to the left.
According to the Phillips curve, if policymakers contract aggregate demand, they can ________ inflation and ________ unemployment.
reduce; raise Contractions of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
Which of the following did not occur in the housing and financial crisis?
shift of the long-run Phillips curve to the left The financial crisis resulted in a steep increase in unemployment and a reduction in the rate of inflation, which can be described as a movement to the right along the short-run Phillips curve. The long-run Phillips curve did not shift.
Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally bad conditions for growing crops. The bad weather would
shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right. An adverse supply shock like bad weather shifts the economy's short-run aggregate-supply curve left and the short-run Phillips curve right.
Unemployment is higher and inflation is lower as the aggregate-demand curve ________ a given aggregate supply curve.
shifts leftward along A leftward shift of the aggregate-demand curve leads to higher unemployment and lower inflation.
Which of the following periods of U.S. economic history featured the short-run Phillips curve shifting to the left, but not the long-run Phillips curve?
the Volcker disinflation After the Volcker disinflation, the unemployment rate was lower for each inflation rate, consistent with the short-run Phillips curve shifting left. Monetary policy does not shift the long-run Phillips curve.
It is unanticipated inflation, not inflation per se, that causes
the change in unemployment associated with a change in inflation. Because of rational expectations, anticipated inflation causes the short-run Phillips curve to shift and return the economy quickly to the natural rate of unemployment. It is unanticipated inflation that causes the change in unemployment.
The economy will move to a point on the short-run Phillips curve where unemployment is lower if
the inflation rate increases. Shifts in aggregate demand push inflation and unemployment in opposite directions in the short run. On the Phillips curve, lower unemployment goes with higher inflation.
According to the Phillips curve, unemployment and inflation are not related at all in
the long run, but not in the short run. Milton Friedman and Edmund Phelps concluded that there is no reason to think that the rate of inflation would, in the long run, be related to the rate of unemployment.
Refer to the Figure . Which curve offers policymakers a "menu" of combinations of inflation and unemployment?
the right-hand graph A "menu" of combinations of inflation and unemployment are represented on a Phillips curve, which has unemployment on the horizontal axis and inflation or the price level on the vertical axis.
Refer to the Figure. Which graph measures the inflation rate along its vertical axis?
the right-hand graph The right-hand graph is a Phillips curve, which measures the inflation rate along its vertical axis.
Refer to the Figure. Which graph measures the unemployment rate along its horizontal axis?
the right-hand graph The right-hand graph is a Phillips curve, which measures the unemployment rate along its horizontal axis.
Refer to the Figure. What is measured along the horizontal axis of the right-hand graph?
the unemployment rate The right-hand graph is a Phillips curve. The horizontal axis of a Phillips curve is the unemployment rate
Other things the same, if there is a decrease in the money supply growth rate that is larger than expected, then in the short run
the unemployment rate will be above its natural rate. A decrease in the money supply growth rate shifts the aggregate-demand curve to the left and unemployment rises above its natural rate.
In which of the following periods of U.S. economic history did expected inflation appear not to fall and the short-run Phillips curve remained relatively stable as a result?
the very low inflation in 2009 and 2010 The very low inflation of 2009 and 2010 does not appear to have reduced expected inflation, which kept the short-run Phillips curve relatively stable.
According to Friedman and Phelps, when actual inflation is less than expected inflation, the
unemployment rate is above the natural rate. If policymakers decrease aggregate demand, unemployment rises above its natural rate and the actual inflation rate falls below expected inflation.
According to the short-run Phillips curve, inflation
would rise and unemployment would fall if policymakers increased the money supply. A decrease in the money supply would shift the aggregate-demand curve left, which would cause inflation to fall and unemployment to rise.