Down the relationship developed as a result of

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Chapter 10 / Exercise 1a
Exploring Macroeconomics
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down. The relationship developed as a result of aggregate demand changes. 10. (c) The Phillips Curve revealed a negative relationship between the inflation rate and the unemployment rate. 11. (d) The natural rate includes both structural and frictional unemployment. 12. (d) Refer to p. 261 [573]. As prices rise, wages rise to keep pace, and the level of employment is stable. 13. (a) There is a trade-off between inflation and unemployment in the short run but, as wages adjust to catch up with rising prices, the natural rate of unemployment will be restored. 14. (a) Higher (lower) supply decreases (increases) the inflation rate and decreases (increases) the unemployment rate. 15. (c) The major raw material to show price increases was oil. Options (a) and (b) would shift aggregate demand. Option (d) is a fiction. 16. (a) The spending increase is an expansionary fiscal policy that will shift the AD curve to the right. The unemployment rate will decrease and the inflation rate will increase—a move along the Phillips Curve. 17. (a) The move from E to D represents a decrease in inflation and unemployment. This will occur if the AS curve shifts to the right, as will happen when firms expect less inflation. 18. (b) The rise in the price of raw materials (imported or otherwise) will shift the AS curve to the left. 19. (a) Point A represents unemployment that is lower than the natural rate, indicating that production is extremely high. Structural and frictional unemployment, although low, can’t be negative! 20. (c) The long-run Phillips Curve is vertical, to be sure. However, because the unemployment rate shown at Point E is the natural rate, the long-run Phillips Curve will pass through this point. II. Solutions to Application Questions
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Chapter 10 / Exercise 1a
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Chapter 14 [29]: The Labor Market in the Macroeconomy 115 1. (a) An increase in aggregate demand would decrease unemployment and increase inflation in the short run. (b) Aggregate supply will shift left. Price level will increase and output will decrease. The negative relationship between the inflation rate and the unemployment rate will be absent. There would be a move off the existing Phillips Curve to Point E . (c) Aggregate supply will shift left. Price level will increase and output will decrease. The negative relationship between the inflation rate and the unemployment rate will be absent. There would be a move off the existing Phillips Curve to Point E . (d) Aggregate demand will increase causing the price level to increase and output to increase. There would be a move along the existing Phillips Curve to Point B . (e) Aggregate supply will increase causing the price level to decrease and output to increase. The inflation rate will decrease and the unemployment rate will decrease. There would be a move off the existing Phillips Curve to Point D . (f) Aggregate demand will decrease causing the price level to decrease and output to decrease. The inflation rate will decrease and the unemployment rate will increase—a movement along the Phillips Curve to Point C . (g) There is a mismatch between the actual inflation rate (3%) and the expected inflation rate (0%). The Phillips Curve is based on a particular level of inflationary expectations. In the

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