ECON 201 Chapter Notes -Phillips Curve, Money Supply, Rational Expectations

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emeraldcrab303

11 Mar 2014

School

University of Maryland

Department

Economics

Course

ECON 201

Professor

Dr.Neri

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ECON 201 Full Course Notes

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Document Summary

The short-run trade-off between inflation and unemployment. Phillips curve: a curve that shows the short-run trade-off between inflation and unemployment. The phillips curve shows the combinations of inflation and unemployment that arise in the short run as shifts in the ad curve move the economy along the short-run as curve. Higher price level = higher inflation (high ad: this leads to less unemployment (more output) Shifts in the phillips curve: role of expectations rate) but not real variables (output and unemployment). Vertical lras and phillips curve (natural rate) Long run: monetary policy influences nominal variables (price level and inflation. Can be influenced by other policies like min wage, collective bargaining, unemployment insurance, and job training programs. (shift) Expected inflation: measures how much people expect the overall price level to change. (create by increasing money supply) Natural rate hypothesis: the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation.

Related Questions

8) What can be concluded from Milton Friedman and Edmund Phelps' expectations-augmented Phillips curve?

A) that there is no long run tradeoff between unemployment and inflation

B) that there is a short run tradeoff between unemployment and inflation

C) that there are two types of Phillips curves

D) all of the above

E) none of the above

9) Given the accelerationist Phillips curve ?? = - 0.3 (U - 6) + ?, suppose that inflation in the preceding period was 3 percent, unemployment is 6 percent, and there is a price shock of 2 percent. The current inflation rate is ________.

A) 3 percent

B) 0.2 percent

C) 5 percent

D) 1 percent

E) none of the above

10) Which of the following shows a negative relationship between the output and unemployment gaps?

A) the AS curve

B) the Phillips curve

C) Okun's law

D) the classical dichotomy

E) none of the above

1. For a closed economy, the IS curve describes short-run movements in an economy via which of the following?

a. Interest rate Investment Output
b. Interest rate Investment Output
c. Tax rate Consumption Output
d. Interest rate Investment Output
e. Tax rate Government expenditure Output

2. A key difference between the long run and short-run models is the assumption _____________ in the short run

a. of zero inflation
b. of perfect price flexibility
c. that unemployment always equals its natural rate
d. that the economy never deviates from its long-run equilibrium
e. of sticky inflation (inflexible prices)

3. If prices are sticky and the Fed raises the nominal interest rate (ceteris paribus), __________ and __________ in the short run.

a. the real interest rate remains constant; real output remains at potential
b. the real interest rate falls; short-run real output falls
c. the unemployment rate rises; short-run real output rises
d. the real interest rate rises; short-run real output falls
e. the real interest rate falls; current real output falls

4. According to the Phillips curve, if the current output is above potential output (a boom),

a. inflation rises.
b. inflation falls.
c. unemployment rises.
d. inflation is constant.
e. prices fall.

5. According to the Phillips curve, in general during a recession

a. inflation rises.
b. prices fall.
c. unemployment falls.
d. inflation is constant.
e. inflation falls.

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1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

interest rate rises; investment falls

interest rate rises; investment rises

interest rate falls; investment rises

interest rate falls; investment falls

2. The main goal of monetary policy is to shift

3. Which of the following is true regarding the effects of an expansionary monetary policy?

Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.

Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.

Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.

Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.

You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.

You, the owner of an airline company, sign a two-year contract for airline fuel.

You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

real GDP and price level.

price level and inflation rate.

unemployment rate and inflation rate.

unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.

The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.

Both the short-run and long-run Phillips curves are downward sloping.

Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?