Question

In: Economics

1. According to the Phillips curve, policymakers could reduce both inflation and unemployment by A. increasing...

1. According to the Phillips curve, policymakers could reduce both inflation and unemployment by
A. increasing the money supply.
B. decreasing government expenditures.
C. increasing government expenditures.
D. raising taxes.
E. None of the above is correct.

which of the following statements is (are) correct?
(x) The natural rate of unemployment is the rate of unemployment that the economy tends to move to in the long run and it is not dependent on the money supply.
(y) A vertical long-run Phillips curve is consistent with the principle of monetary neutrality and it implies that the natural rate of unemployment is independent of the inflation rate.
(z) Government policy that creates structural unemployment via minimum wage laws or a change in frictional unemployment via increased unemployment benefits can alter the natural rate of unemployment.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

According to the long-run Phillips curve as described in the textbook, in the long run, unemployment depends upon factors such as
(x) the power of unions and minimum wage laws that alter the amount of structural unemployment.
(y) the nature of the job search process and the amount and duration of unemployment benefits.
(z) fiscal policy that reduces the amount of cyclical unemployment.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Solutions

Expert Solution

Question 1 answer :- E

Explanation -

The Phillips curve shows the inverse relationship between inflation and unemployment: as unemployment decreases, inflation increases.

The concept behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa.

Stagflation occurs when an economy experiences stagnant economic growth, high unemployment and high price inflation. This scenario, of course, directly contradicts the theory behind the Philips curve. The United States never experienced stagflation until the 1970s, when rising unemployment did not coincide with declining inflation. Between 1973 and 1975, the U.S. economy posted six consecutive quarters of declining GDP and at the same time tripled its inflation.

In the United States, the most famous period during which inflation and unemployment were positively correlated was the 1970s. Termed stagflation, the combination of high inflation, high unemployment and sluggish economic growth that plagued this decade came about for several reasons. President Richard Nixon removed the U.S. dollar from the gold standard. Instead of being tied to a commodity with intrinsic value, the currency was left to float, its value subject to market whims.

Positive correlation between inflation and unemployment can also be a good thing – as long as both levels are low. The late 1990s featured a combination of unemployment below 5% and inflation below 2.5%. An economic bubble in the tech industry was largely responsible for the low unemployment rate, while cheap gas amid tepid global demand helped keep inflation low. In 2000, the tech bubble burst, resulting in an unemployment spike, and gas prices began to climb. From 2000 to 2020, the relationship between inflation and unemployment once again followed the Phillips curve, but far less


Related Solutions

Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve: ??=???????(???????). In...
Suppose that the tradeoff between unemployment and inflation is determined by the Phillips curve: ??=???????(???????). In addition, suppose that the country involves two political parties, the Left and the Right. Suppose that the Left party always follows a policy of high money growth and the Right party always follows a policy of low money growth. What “political business cycle” pattern of inflation and unemployment would you predict under the following conditions? 1) Every four years, one of the parties takes...
If a Phillips curve shows that unemployment is high and inflation is low in the economy,...
If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy: a) is producing at a point where output is less than potential GDP. B) is producing at its potential GDP. C) is producing at a point where output is more than potential GDP. D) is producing at its equilibrium point. Question 21 pts A fiscal policy that increases government spending or cuts taxes is most appropriate when the economy is in:...
7. To move to a point on the Phillips curve where inflation is lower, A. unemployment...
7. To move to a point on the Phillips curve where inflation is lower, A. unemployment must fall. B. the Fed could increase the money supply. C. the government could decrease taxes. D. All of the above E. None of the above are correct. which of the following statements is (are) correct? (x) During the early 1960s, inflation was about 1 to 3 percent in the United States, compared to about 4 to 6 percent in the late 1960s and...
Unemployment and Inflation Two of the biggest issues in macroeconomics are inflation and unemployment. Policymakers would...
Unemployment and Inflation Two of the biggest issues in macroeconomics are inflation and unemployment. Policymakers would like to keep both of these measures low. Often, however, there is a tradeoff between the two. A strong economy that lowers unemployment can put upward pressure on prices. A weak economy that lowers inflation can increase unemployment. We currently have the benefit of both very low unemployment and inflation. But things could change and it’s good to have policy plans in place before...
33. Demand shocks move unemployment and inflation in A) the same directions, as the Phillips Curve...
33. Demand shocks move unemployment and inflation in A) the same directions, as the Phillips Curve suggests. B) opposite directions, as the Phillips Curve suggests. C) the same directions, which is not what the Phillips Curve suggests. D) opposite directions, which is not what the Phillips Curve suggests. E) circles. 34. When Komal gathers up all of her loose change and deposits it in her chequing account, the immediate effect is A) both M1+ and M2+ increase. B) M1+ increases...
To move to a point on the Phillips curve where inflation is lower, unemployment must rise...
To move to a point on the Phillips curve where inflation is lower, unemployment must rise and the unemployment rise could have been caused by the Fed decreasing the money supply. Select one: True False According to the natural rate hypothesis (Friedman and Phelps), policymakers face a long-run Philips curve that is vertical because the natural unemployment rate is independent of the inflation rate. Select one: True False The federal government could increase spending and decrease taxes to move to...
INFLATION AND THE PHILLIPS CURVE explain with your own words 1 What is the Phillips curve?...
INFLATION AND THE PHILLIPS CURVE explain with your own words 1 What is the Phillips curve? 2 What is the relationship between inflation and growth?
An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off...
An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off less favourable.True or false?(+explanation)
Briefly explain the Phillips curve relation between inflation and unemployment and its policy implications for macroeconomic...
Briefly explain the Phillips curve relation between inflation and unemployment and its policy implications for macroeconomic management. What challenge did the Phillips curve relation pose to the Keynesians working in the economic environment of the post-War period and how did Keynesians reconcile to it? Briefly explain implication and predictive inconsistency of the Keynesian-neoclassical synthesis model.
The short-run Phillips curve is the negative short-run relationship between the unemployment rate and the inflation...
The short-run Phillips curve is the negative short-run relationship between the unemployment rate and the inflation rate.  Suppose the Phillips curve is given by ?t = ?e + 0.2 – 5ut  where ?e= ? ?t-1. In this context ? is the actual inflation rate, ?e is the expected inflation rate and ? is a parameter indicating the relative speed of adjustment of expected inflation to actual inflation. Explain to the best of your abilities, the following questions. a) Explain the difference between...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT