Swalaheen. Inflation, unemployment, and federal reserve policy.
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
Help!
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| T/F: Higher employment is usually accompanied by higher inflation. | FALSE. Higher inflation usually leads to LOWER inflation. While lower employment leads to higher inflation.
*There is an inverse relationship between unemployment and inflation.
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| Phillips Curve | A curve showing the short-run relationship between the unemployment rate and the inflation rate.
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| Structural Relationship | A relationship that depends on the basic behavior of consumers and firms and that remains unchanged over long periods.
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| T/F: The Phillips Curve does NOT represent a permanent trade-off between unemployment and inflation. | TRUE.
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| Natural Rate of Unemployment | The unemployment rate that exists when the economy is at potential GDP.
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| T/F: The long-run Phillips Curve is a vertical line at the natural rate of unemployment. | TRUE.
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| How do you calculate Real Wage? | Nominal Wage /Price Level x 100 = Real Wage
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| If actual inflation is greater than expected inflation... | The actual wage is less than the expected real wage, and the unemployment rate falls.
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| If actual inflation is less than expected inflation... | The actual real wage is greater than the expected real wage and the unemployment rate rises.
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| T/F: Expected inflation increases the value of total production and the value of total income by an amount GREATER than the rate of inflation. | FALSE. It increases by the same amount.
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| Nonaccelerating inflation rate of unemployment (NAIRU) | The unemployment rate at which the inflation rate has no tendency to increase or decrease.
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| T/F: In the long-run the Federal Reserve can affect the inflation rate but not the unemployment rate. | TRUE.
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| Frictional or structural unemployment can change the natural rate of unemployment by: | 1) Demographic changes
2) Labor Market Institutions
3) Past high rates of unemployment
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| Rational Expectations | Expectations formed by using all available information about an economic variable.
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| Real Business cycle models | Models that focus on real rather than monetary explanations or fluctuations in real GDP.
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| Disinflation | A significant reduction in the inflation rate.
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