Module 11

Question 1

Short-run Philips Curve

Answer 1

Ceteris paribus, in the SHORT-RUN, the Philips curve shows the negative relationship between inflation rate and unemployment rate.

Question 2

Long-run Philips curve

Answer 2

Ceteris paribus, in the LONG-RUN, the Philips curve shows no relationship between inflation rate and unemployment rate (a vertical line)

Question 3

Natural rate of unemployment

Answer 3

The natural rate of unemployment occurs are potential GDP (derived from LRAS)
Natural rate of unemployment = frictional + structural.

Question 4

What causes a movement along the short-run Philips curve?

Answer 4

A change in policies (i.e expansionary and contractionary)

Question 5

Expansionary policies (monetary and fiscal)

Answer 5

lead to a lower unemployment rate but higher inflation rate (leftward)

Question 6

Contractionary policies (monetary and fiscal)

Answer 6

lead to lower inflation, but higher unemployment (rightward)

Question 7

What causes a shift in the short-run Philips curve?

Answer 7

A change in expectations

Question 8

Expectations of higher inflation

Answer 8

shift the short run Philips curve rightwards.

Question 9

Expectations of lower inflation

Answer 9

shift the short run Philips curve leftwards.

Question 10

What happens at the natural rate of unemployment?

Answer 10

The inflation rate is nonaccelerating (NAIRU).

Question 11

If unemployment rate is less than the natural rate..

Answer 11

inflation rate increases

Question 12

If the unemployment rate is greater than the natural rate…

Answer 12

inflation rate decreases

Question 13

What can the Fed. affect in the long run?

Answer 13

The Fed can affect the inflation rate, not the unemployment rate.

Question 14

Chairman Volcker

Answer 14

Built a reputation of an inflation fighter by reducing the annual growth of money supply and shifting the short run Philips curve left.