Macro Ch 12 Final

Front 1

Phillips research looked at British data on

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Unemployment and nominal wage growth

Front 2

The negative relationship between unemployment and inflation is known as the

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Phillips curve

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Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between

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unanticipated inflation and cyclical unemployment

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Milton Friedan and Edmund Phelps questioned

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the stability of the relationship between inflation and unemployment

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In the extended classical model, an anticipated decrease in the money supply would cause output to ____ & the price level to _____ in the short run.

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remain unchanged; decrease

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In the extended classical model, an unanticipated increase in the money supply would cause output to _______ and the price level to____ in the short run.

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increase; increase

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In the extended classical model, an unexpected decrease in aggregate demand would cause unanticipated inflation to be ___ and cyclical unemployment to be ____.

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negative; positive

Front 8

In the expectations - augmented Phillips curve, π = πe – 3(u – u* ). If π = 0.03 when πe = 0.06 and u* =
0.06, then u =

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.05

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In the expectations-augmented Phillips curve, π = πe – 3(u – 0.06). When π = 0.06 and πe = 0.03, the
unemployment rate is

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.05

Front 10

The Phillips curve is the relation between inflation and unemployment that holds for a given natural
rate of unemployment and a

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given expected rate of inflation

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Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%. Instead, the Fed increases the money supply by 5%. In the
short run, this would cause actual output to be _____ full-employment output and prices to increase
by _____ 3%.

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above; more than

Front 12

An increase in the expected rate of inflation would

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shift the Phillips curve upward

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If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

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shift the Phillips curve to the left

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If the expected rate of inflation rose at the same time the natural rate of unemployment rose, the Phillips curve

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would shift up

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A beneficial supply shock would cause

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the short run Phillips curve to shift downward and to the left

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Classical's argue that an adverse supply shock would

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raise both the natural rate of unemployment and the actual rate of unemployment

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Historically, Brazil has suffered higher and more variable rates of inflation than Venezuela. You
would expect the short-run aggregate supply curve of Brazil to be _____ than that of Venezuela, and
the Phillips curve of Brazil to be _____ than that of Venezuela.

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steeper; steeper

Front 18

The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

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as long as the expected inflation rate and the natural rate of unemployment are approximately constant

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The Phillips curve shifted during the 1970s primarily because of

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the two large oil price shocks

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Examining data on cyclical unemployment plotted against unanticipated inflation shows

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a negative relationship

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The Friedman-Phelps analysis suggests that there is a long-term relationship between

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unanticipated inflation and cyclical unemployment.

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An analysis of the American economy since 1960 shows that there is a stable relationship between
inflation and unemployment

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only in the short run

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Both classicals and Keynesians agree that policymakers

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cannot keep the unemployment rate permanently below the natural rate by permanently running
a high rate of inflation.

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The Lucas critique is an objection to the assumption that

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historical relationships between macroeconomic variables will continue to hold after new
policies are in place.

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The argument that when policy changes, people’s behavior changes so that historical relationships
between macroeconomic variables will no longer hold is known as

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The Lucas critique

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The long run phillips curve is

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vertical

Front 27

The fact that the long-run Phillips curve is vertical implies that

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money is neutral in the long run

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When the economy goes into a recession, theres an increase in

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cyclical unemployment

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Some economists argue that Okun’s Law overstates the cost of cyclical unemployment because

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it ignores the fact that leisure increases during a recession

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Nordhaus's theory of political business cycles suggests that

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politicians will use expansionary policy to stimulate the economy in election years

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Combining the partisan theory with rational expectations and the expectations-augmented Phillips
curve led Alesina to theorize that when a Democrat is elected as President, inflation will be _____
than expected, while unemployment will _____.

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higher; fall

Front 32

One reason for the fall in the natural rate of unemployment since 1980 is

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changes in the demographic composition of the work force

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Hysteresis in unemployment means

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the natural rate of unemployment changes in response to the actual rate of unemployment.

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The idea that the natural rate of unemployment rises when the actual rate of unemployment rises is
known as

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hysteresis

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The insider-outsider theory suggests that

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unions seek high wages without causing firms to cut employment.

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Empirical evidence by Burtless on the effect of unemployment insurance on unemployment suggests
that

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longer benefit duration accounts for longer spells of unemployment.

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Which of the following would probably be the most effective at reducing structural unemployment?

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retain workers who are unemployed

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a high pressure economy is one in which

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monetary and fiscal policy are used to keep unemployment as low as possible

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one cost of a perfectly anticipated inflation is that it

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increases menu costs

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when actual inflation is greater than expected inflation

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there are transfers from lenders to borrowers

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One cost of an unanticipated inflation is that it

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transfers wealth from lenders to borrowers

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A COLA is

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a cost of living adjustment

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Hyperinflation occurs when

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the inflation rate is extremely high

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The reduction of the inflation rate is called

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disinflation

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The costs of disinflation would be low if

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expected inflation falls as inflation falls

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A rapid and decisive reduction in the rate of growth of the money supply for the purpose of
disinflation is called

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a cold turkey policy

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Keynesians prefer a disinflation policy of

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gradualism

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The sacrifice ratio is

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the amount of output lost when the inflation rate is reduced by one percentage point.

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The amount of output lost when the inflation rate is reduced by one percentage point is called

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the sacrifice ratio

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Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about

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2

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Ball’s research showed that the sacrifice ratio

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varied considerably across countries

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Ball found that an important factor affecting the sacrifice ratio was

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the flexibility of the labor market

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Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely
to have _____ sacrifice ratio.

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a high

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Countries in which wages adjust rapidly to changes in the supply and demand for labor are likely to
have _____ sacrifice ratio.

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a low

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Countries in which the government does not regulate the labor market are likely to have _____
sacrifice ratio.

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a low

Front 56

Ball’s research on disinflation across different countries found that

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costs of disinflation were smaller for rapid disinflation than for gradual disinflation.

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If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is
best accomplished by

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a cold turkey approach

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The main determinant of how quickly expected inflation adjusts to changes in monetary policy is

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the credibility of the central bank.