Ch 22 SR Tradeoff btw Inflation and Unemployment

what does Phillips curve show?

a negative relationship btw inflation rate and unemployment

low unemployment associated with ______ agg demand

high

graph of PS

-higher point associated w/ increase in $ supply, gov spending, cuts in taxes, etc (b/c they increase agg demand)

-lower points on curve associated w/ decrease in $ supply, gov spending

shifts in agg demand causes ______ along PS curve

movement

rightward shift in agg demand _____ unemployment and ________ inflation rate

1. decreases

2. raises

T/F: in long run, unemployment and inflation are not related

true

graph showing how LR PS is related to AS/AD

in long run, expansionary monetary policy only leads to

higher inflation

expected inflation is related to LR or SR PS curve?

short run

SR PS Curve Eq:

Unemployment Rate = NRU - a (actual - expected inflation)

graph showing how expected inflation shifts SR PS curve:

1. expansionary policy moves economy up along SR curve

2. In long run, expected inflation rises, and SR curve shifts to right

natural rate experiment

unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

what causes a shift in agg supply, and thus, PS curve?

supply shocks

def of supply shocks

event directly altering firms’ costs and prices

graph of supply shock

disinflation is a reduction in

inflation rate

deflation is reduction in

price level

what is the sacrifice ratio?

the # of % points of annual output lost in process of reducing inflation by 1%

in sacrifice ratio, to reduce interest rate, gov must pursue _________ monetary policy

contractionary

graph of sacrifice ratio

-contractionary policy moves economy down SR PC

-in long run, expected inflation falls, and SR PC shifts left

according to sacrifice ratio, if a nation wants to reduce inflation, it must endure a period of ______ unemployment and ____ output.

high / low

rational expectations

theory that people optimally use all the info they have when predicting future

ex: if unions expect high future inflation rates, they may strike inflationary bargains