| Question | Suppose that a fall in consumer spending causes a recession. a. Illustrate the immediate change in the economy using both an aggregate-supply/ aggregate-demand diagram and a Phillips-curve diagram. On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B. What happens to inflation and unemployment in the short run? b. Now suppose that over time expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation–unemployment combinations? |
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| Subject | business-economics |
Order the answer to: Suppose that a fall in consumer spending causes a recession.
Order the answer to: Illustrate the effects of the following developments on both the
| Question | Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers. a. A rise in the natural rate of unemployment b. A decline in the price of imported oil c. A rise in government spending d. A decline in expected inflation |
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| Subject | business-economics |
Order the answer to: Suppose the natural rate of unemployment is 6 percent. On
| Question | Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case. a. Actual inflation is 5 percent, and expected inflation is 3 percent. b. Actual inflation is 3 percent, and expected inflation is 5 percent. c. Actual inflation is 5 percent, and expected inflation is 5 percent. d. Actual inflation is 3 percent, and expected inflation is 3 percent. |
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| Subject | business-economics |
Order the answer to: The Fed decides to reduce inflation. Use the Phillips curve
| Question | The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs be reduced? |
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| Subject | business-economics |
Order the answer to: Suppose a drought destroys farm crops and drives up the
| Question | Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run trade-off between inflation and unemployment? |
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| Subject | business-economics |
Order the answer to: What is “natural” about the natural rate of unemployment? Why
| Question | What is “natural” about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries? |
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| Subject | business-economics |
Order the answer to: Draw the long-run trade-off between inflation and unemployment.
| Question | Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related. |
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| Subject | business-economics |
Order the answer to: Draw the short-run trade-off between inflation and unemployment.
| Question | Draw the short-run trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another? |
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| Subject | business-economics |
Order the answer to: What is the sacrifice ratio? How might the credibility of
| Question | What is the sacrifice ratio? How might the credibility of the Fed’s commitment to reduce inflation affect the sacrifice ratio? |
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| Subject | business-economics |
Order the answer to: Give an example of a favorable shock to aggregate supply.
| Question | Give an example of a favorable shock to aggregate supply. Use the model of aggregate demand and aggregate supply to explain the effects of such a shock. How does it affect the Phillips curve? |
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| Subject | business-economics |
