Econ 202 Chapter 17

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

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

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

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

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

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

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

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

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

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

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

Unemployment would increase and prices would decrease if

aggregate demand shifts left; Leftward shifts of aggregate demand move the economy to a point on the Phillips curve with lower inflation and higher unemployment

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 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

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

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)

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

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

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

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

Refer to the Figure . Which curve offers policymakers a "menu" of combinations of inflation and unemployment?

the right-hand graph

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

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

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. The long-run Phillips curve is Curve

1

The U.S. economy had an inflation rate of more than 9 percent and an unemployment rate of about 7 percent in

1980

The short-run Phillips curve is Curve

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

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

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

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

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

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

Policymakers prefer both low inflation and low unemployment. The historical data summarized by the Phillips curve indicate that this combination of:

impossible; According to Samuelson and Solow, policymakers face a trade-off between inflation and unemployment. Therefore, the combination of low inflation and low unemployment is impossible

Refer to the Figure. The economy would move from C to F

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

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

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 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

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

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

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

The Greenspan era can be characterized as being one that ____

the Federal Reserve was careful to avoid the policy mistakes of the 1960s

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

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

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

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