6 fiscal policy cannot be used to move the economy

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Chapter 26 / Exercise 33
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6. Fiscal policy cannot be used to move the economy along the short-run Phillips curve. 7. If the Fed were to increase the money supply, inflation and unemployment would both increase in the short run. 8. The vertical long-run Phillips curve is an exception to monetary neutrality implied by the classical dichotomy. 9. Friedman and Phelps believed that the natural rate of unemployment was constant. 10. Although monetary policy cannot reduce the natural rate of unemployment, other types of policies can. 11. A policy change that reduced the natural rate of unemployment would shift both the long-run aggregate-supply curve and the long-run Phillips curve left. 12. In the long run, people come to expect whatever inflation rate the Fed chooses to produce, so unemployment returns to its natural rate. 13. The analysis of Friedman and Phelps argues that any change in inflation that is expected has no impact on the unemployment rate.
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Chapter 26 / Exercise 33
Exploring Economics
Sexton
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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?

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