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Exam 16: The Short-Run Tradeoff between Inflation and Unemployment

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Question 51

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In responding to the Phillips curve hypothesis,Friedman argued that a central bank can peg which of the following?

A) the unemployment rate
B) the inflation rate
C) the growth rate of real GDP
D) the real exchange rate

E) B) and C)
F) A) and D)

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Question 52

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Suppose the natural rate of unemployment is 6 percent,the expected inflation is 2 percent,and the constant a in the short-run Phillips curve equation is 0.8.Describe the process of adjustment when the expected inflation rate changes from 2 percent to 3 percent.

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First,the actual inflation rate increase...

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Question 53

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Suppose the Bank of Canada decreased the growth rate of the money supply.Which of the following would permanently decrease?

Short-run outcomes in the economy can be expressed in terms of output and the price level,or in terms of unemployment and inflation.

Which of the following would NOT be associated with an adverse supply shock?

A policy change that reduced the natural rate of unemployment would shift both the long-run aggregate-supply curve and the long-run Phillips curve left.

Compared to the 1970s,how did the Canadian short-run Phillips curve move in recent years and why?

What do the data for the period of 1973 through 1980 demonstrate?

An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

Figure 16-1 -Refer to the Figure 16-1.If the economy starts at c and 1,then in the short run,where does a decrease in government expenditures move the economy?

Figure 16-2 -Refer to the Figure 16-2.What is Curve 2?

Suppose the government passes legislation that decreases the natural rate of unemployment.How does this change the long- and short-run Phillips curves?

Figure 16-2 -Refer to the Figure 16-2.Suppose the economy is initially at point c. If the money supply growth rate decreases, where does the economy move to in the short-run?

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by 1 percentage point.

According to Phillips,which of the following sets of two items have a negative relation?

This exercise uses an aggregate-supply curve and a production function to construct the corresponding Phillips curve.Its purpose is to better understand the assumptions behind the short-run Phillips curve.Suppose the aggregate production function of an economy is Y=L,where Y is output and L is labour (employment).Unemployment is U=LF-L,and the unemployment rate is u = U/LF.We also need to assume that the labour force (LF)is constant,such that an increase in the number of employed people (DL)corresponds to an equal decrease in the number of unemployed (-DU).Let us assume a very simple-short run aggregate supply curve,Y=P.Question: For the price levels P equal 100,105,and 115,find two inflation-unemployment points in a Phillips curve diagram.Consider LF=120.

Suppose the natural rate of unemployment is 6 percent,the expected inflation is 2 percent,and the constant a in the short-run Phillips curve equation is 0.8.Change the expected inflation to 3 percent and draw the new Phillips curve.How did it change?

Figure 16-3 -Refer to the Figure 16-3.When would the economy move from c and 3 to e and 5?

If policymakers accommodate an adverse supply shock,what will happen to the unemployment rate and inflation?

According to Friedman and Phelps,when is the unemployment rate above the natural rate?