Question

Explain only 3 of the following:

1. Short run tradeoff (negative relationship) between unemployment & inflation.

2. Expenditure multiplier + Tax multiplier = 1.

3. Money supply curve is vertical.

4. policy is not efficient in the LR.

Answer 1

• There is negetive relationship between inflation and unemployment ,

  Unemployment rate equation= Natural rate of unemployment - Actual inflation- Expected inflation

If actual inflation exceeds expected inflation then unemployment will fall below the natural rate by an amount that depends on the parameters. Unemployment and inflation in the short run if the Fed increases the growth rate of the money is followed by inflation increases unemployment , decreases. In the short run the philips curve is downward sloping.

• The money supply curve is vertical because the Federal reserve sets the money supply. Interest rate donot affect the money supply only fed can alter the money supply.
• In long run ,allocative efficiency requires that capacity to be chosen so that the expected market price is equal to the long run marginal production. Average cost pricing generally leads to inefficient long run investment decisions.