103 10414. In the Friedman-Phelps analysis, when inflation is less than expected, unemployment is greater than the natural rate. 15. According to the Friedman-Phelps analysis, in the long run, actual inflation equals expected inflation, and unemployment is at its natural rate. 16. An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve. 17. An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left. 18. In most of the 1970s, the Fed’s policy raised inflation expectations. 19. A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift right. 20. The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point. IV PROBLEMS AND APPLICATIONS 1. Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain. 2. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward discuss. 3. Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve. 4. Suppose that the Fed unexpectedly decreases the money supply. What will happen to unemployment in the short run? What will happen to unemployment in the long run? 5. What did Friedman and Phelps predict would happen if policy -makers tried to move the economy upward along the Phillips curve? (That is, to increase inflation and reduce unemployment? Were they right or wrong? 6. Some countries have inflation in excess of 20 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 20 percent to 4 percent?