chp 17

WHEN AGGREGATE DEMAND INCREASES, _____________FALLS AND ___________RISES

UNEMPLOYMENT FALLS AND INFLATION RISES AS A RESULT, THERE IS A SHORT RUN TRADE OFF

WHEN THE INFLATION RATE IS AT THE EXPECTED LEVEL, THE __________________________ I.E. THE LONG RUN PHILLIPS CURVE

UNEMPLOYMENT LEVEL IS AT ITS NATURAL RATE,

WHEN AGGREGATE DEMAND DECREASES, __________RISES AND ___________FALLS

UNEMPLOYMENT RISES, AND INFLATION FALLS, AS A RESULT, THERE IS A SHORT RUN TRADE OFF

NATURAL RATE OF UNEMPLOYMENT

UNEMPLOYMENT, IN THE LONG RUN, GOES TO THE NATURAL RATE OF UNEMPLOYMENT, WHEN OUTPUT RETURNS TO POTENTIAL GDP. AT THIS OUTPUT LEVEL, THERE IS NO CYCLICAL UNEMPLOYMENT; BUT THERE DOES REMAIN STRUCTURAL AND FRICTIONAL UNEMPLOYMENT. THERE 2 ARE NOT PREDICTIBALY AFFECTED BY INFLATION.

LUCAS AND SARGENT CONCLUDED THAT THE FED COULD AFFECT OUT AND EMPLOYMENT BUT ONLY THROUGH

UNEXPECTED CHANGES TO THE MONEY SUPPLY

THE LONG RUN AGGREGATE SUPPLY CURVE MEANS A

VERTICLE LONG RUN PHILLIPS CURVE

IN THE LONG RUN EMPLOYMENT IS DETERMINED BY OUTPUT,

WHICH IN THE LONG RUN DOESN'T DEPEND ON THE PRICE LEVEL

RATIONAL EXPECTATIONS

WORKERS AND FIMS ANITICIPATING AND ADJUSTING THEIR EXPERIENCES ABOUT INFLATION ACCORIDNGLY

ADAPTIVE EXPECTATIONS

WORKERS AND FIRMS EXPECTING INFLATION TO BE THE SAME AS IT WAS LAST PERIOD

SUPPLY SHOCK SHIFTS SRAS CURVE AND THE SHORT RUN PHILIPS CURVE PROVES THAT BY MOVING ONE MAKES THE OTHER

WORSE. SO FEDS CHOSE EXPANSIONARY MONETARY POLICY, REDUCING UNEMPLOYMENT AND INCREASING INFLATION

phillips curve

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

each point on the phillips curve represents

a possible comboination of unemployment rate and inflation rate that might be observed in a given year

if expected inflation is higher than actual real wages in the economy will turn out to be ______________than expected real wages; consequently, firms will hire ______________ workers than they had planned

higher; fewer

using ad as model to explain phillips curve

in the ad-as model, a small aggregate demand increase leads to low inflation and high unemployment. a stronger ad increase results in lower unemployment but more inflation- the short run phillips curve

why doesn't the phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

in the long run, aggregate supply is vertical

the short run phillips curve exhibits _____________________ where as, he long run phillips curve shows __________________

relationship between unemployment and inflation; there is not permanent trade off between inflation and unemployment

economists in the early 1960s thought of the phillips curve as a "policy Menu" because they thought that the phillips curve

represented a structural relationship in the economy that would not change as a result of policy change

as expectations of inflation increase, the short run phillips curve will

shift right

2 great macroeconomic problems that the feds deal with (in the short run)

unemployment and inflation

the fed wants to move from a point on the short run phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation then it should

use contractionary monetary policy

the long run phillips curve is

vertical at the natural rate of unemployment

assuming people have rational expectations

when the fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real gdp

WHY THE NATURAL RATE OF UNEMPLOYMENT MAY CHANGE

1. DEMOGRAPHIC CHANGES 2. CHANGES IN LABOR MARKET INSTITUTIONS 3. PAST HIGH RATES

REAL BUSINESS CYCLE MODEL

A MACROECONOMIC MODEL THAT FOCUS ON REAL RATHER THAN MONETARY EXPLANATIONS OF THE FLUCTUATIONS IN REAL GDP. THESE 2 APPROACHES ARE AKA AS NEW CLASSICAL MACROECONOMICS

MOST ECONOMISTS BELIEVE AN INCREASE IN INFLATION WILL QUICKLY LEAD TO

AN INCREASE IN WAGES

RATIONAL EXPECTATIONS

EXPECTATIONS FORMED BY ISING ALL AVAILABLE INFORMATION ABOUT AN ECONOMIC VARIABLE

HOW LONG THE ECONOMY STAYS IN THE LONG RUN IS DEPENDENT UPON

HOW FAST FIRMS AND WORKERS ADJUST THEIR EXPECTATIONS ABOUT FUTURE INFLATION

BASIS FOR THE SHORT RUN PHILLIPS CURVE

IF ACTUAL INFLATION IS GREATER THAN EXPECTED INFLATION, THE ACTUAL REAL WAGE IS LESS THAN THE EXPECTED REAL WAGE AND UNEMPLOYMENT RATE FALLS. IF ACTUAL INFLATION IS LESS THAN EXPECTED INFLATION, THE ACTUAL REAL WAGE IS GREATER THAN THE EXPECTED REAL WAGE AND THE UNEMPLOYMENT RATE RISES. FRIEDMAN

BECAUSE ANY RATE OF UNEMPLOYMENT OTHER THAN THE NATURAL RATE RESULTS IN AN INCREASE OR DECREASES IN INFLATION, THE NATURAL RATE OF EMPPOLOYMENT IS SOMETIMES CALLED

NON-ACCELERATING INFLATION RATE OF UNEMPLOMENT OR NAIRCU

models that use factors, such as technology shocks, to explain fluctuations in real gdp instead of change in the money supply are called?

REAL BUSINESS CYCLE MODELS

REAL BUSINESS CYCLE MODELS ARE BASED ON

REAL, NOT MONETARY FACTORS

WHEN A POLICY HAS NO EFFECT ON EMPLOYMENT, THE ______________RUN PHILLIPS CURVE WOULD BE VERTICAL ALSO

SHORT RUN, LUCAS AND SARGENT

A SUPPLY SHOCK SHIFTS THE ___________ _________________________PHILLIPS CURVE

SRAS CURVE AND THE SHORT RUN

FREIDMAN SAYS, THERE IS ALWAYS A TEMPORARY

TRADEOFF BETWEEN INFLATION AND UNEMPLOY MENT, THERE IS NO PERMANENT TRADEOFF, THE TEMPORARY TRADE OFF COMES FROM UNANTICIPTED INFLATION

if actual inflation is higher than expected inflation the

actual real wage is less than the expected wage; unemployment falls.

which of the following will not have an effect on the natural rate of unemployment

changes in monetary policy

phillips curve

graph showing the short run relationship between the unemployment rate and the inflation rate

short run trade off between unemployment and inflation plays a role in the fed's ____________policy

monetary policy

according to the real business cycle models

inflation can change due to movements in the money supply, however, fluctuations in real gdp are mainly explained by changes in the level of technology

Phillips says there is usually an ________________ between unemployment and inflation

inverse relationship

the trade off between unemployment and inflation exists in the short run - a period as long as a several year ----but disappears in the _______________

longrun

during the 1960s the phillips curve was a

structural relationship; a relationship that depends on the basic behavior of consumers and firms that remains unchanged over long periods of time, which in the 1960s APPEARED TO remain sable, BUT THIS IS NOT TRUE

milton friedman argued that the phillips curve did not represent a permanent trade-off between unemployment and inflation since

the long run phillips curve is vertical, there is no trade-offs between unemployment and inflation in the long run

the short run trade off between the rate of inflation and the unemployment rate is best represented by

the phillips curve

if in the long run, real gdp returns to its potential level, then in the long run

the phillips curve is vertical

suppose that the inflation rate is increasing each year for a number of years, then

the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational expectations, then they will use all the available information to forecast future inflation

the phillips curve shows

the relationship between the unemployment and the inflation rates

the phillip curve exhibits

the relationship between unemployment and inflations rates