All Flashcards
What is the long-run effect of expansionary monetary policy on unemployment?
No effect; unemployment returns to the natural rate.
What is the long-run effect of expansionary monetary policy on inflation?
Inflation increases.
How might government policies aimed at retraining workers affect the LRPC?
If successful, it could lower the natural rate of unemployment and shift the LRPC to the left.
How do policies that increase labor market flexibility affect the LRPC?
They may decrease the natural rate of unemployment, shifting the LRPC to the left.
What is the short-run effect of increased government spending on unemployment and inflation?
Unemployment decreases and inflation increases, moving along the SRPC.
What is the impact of wage and price controls on the Phillips curve?
They can temporarily suppress inflation but may lead to shortages and distortions, ultimately not affecting the LRPC.
How can supply-side policies affect the SRPC?
They can shift the SRPC to the left by increasing SRAS.
What is the effect of fiscal policy on LRPC?
Fiscal policy will not affect LRPC.
How does monetary policy affect SRPC?
Monetary policy affects SRPC by shifting AD.
How does supply-side policy affect LRPC?
Supply-side policy can shift the LRPC by changing the natural rate of unemployment.
How does an increase in AD affect the SRPC?
Causes a movement along the SRPC, leading to higher inflation and lower unemployment.
How does a decrease in AD affect the SRPC?
Causes a movement along the SRPC, leading to lower inflation and higher unemployment.
How does an increase in SRAS affect the SRPC?
Causes the SRPC to shift left, leading to lower inflation and lower unemployment.
How does a decrease in SRAS affect the SRPC?
Causes the SRPC to shift right, leading to higher inflation and higher unemployment (stagflation).
What happens to the LRPC if the natural rate of unemployment increases?
The LRPC shifts to the right.
What does the LRPC imply about attempts to lower unemployment below the natural rate?
In the long run, it only leads to higher inflation without a sustained decrease in unemployment.
How does a positive supply shock affect the economy and the Phillips Curve?
SRAS increases, SRPC shifts left, resulting in lower inflation and lower unemployment.
How does a negative supply shock affect the economy and the Phillips Curve?
SRAS decreases, SRPC shifts right, resulting in higher inflation and higher unemployment (stagflation).
If the economy is operating on the LRPC, what is true about unemployment?
The economy is at the natural rate of unemployment.
Explain the relationship between the AD/AS model and the Phillips Curve.
The Phillips Curve is a reflection of the AD/AS model, showing the relationship between inflation (price level changes in AD/AS) and unemployment (related to output in AD/AS).
Differentiate between movements along the SRPC and shifts of the SRPC.
Movements along are caused by changes in AD; shifts of are caused by changes in SRAS.
Compare the short-run and long-run effects of an increase in the money supply on unemployment.
Short-run: unemployment falls. Long-run: unemployment returns to the natural rate.
Compare the short-run and long-run effects of an increase in the money supply on inflation.
Short-run: inflation increases. Long-run: inflation increases further.
What is the difference between the SRPC and LRPC in terms of policy implications?
SRPC suggests a trade-off policymakers can exploit in the short run. LRPC shows no such trade-off exists in the long run.
Compare the causes of inflation when moving along the SRPC versus shifting the SRPC.
Moving along: caused by increased AD. Shifting: caused by decreased SRAS or increased expected inflation.
Compare the effects of AD and SRAS shifts on inflation and unemployment.
AD increase: inflation up, unemployment down. SRAS decrease: inflation up, unemployment up (stagflation).
Compare the shape and implications of SRAS and LRAS with SRPC and LRPC.
SRAS is upward sloping, SRPC downward sloping, both represent short-run trade-offs. LRAS and LRPC are vertical, showing long-run equilibrium and no trade-offs.
Compare the impact of demand-side vs supply-side policies on the SRPC.
Demand-side: cause movements along the SRPC. Supply-side: cause shifts of the SRPC.
Compare the effect of expansionary monetary policy in the short-run and long-run.
Short-run: decrease unemployment and increase inflation. Long-run: no change in unemployment and increase inflation.
Compare the effect of expansionary fiscal policy in the short-run and long-run.
Short-run: decrease unemployment and increase inflation. Long-run: no change in unemployment and increase inflation.