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.
What is the Phillips Curve?
A graph illustrating the inverse relationship between inflation and unemployment.
Define Short-Run Phillips Curve (SRPC).
Shows the inverse relationship between inflation and unemployment in the short run.
Define Long-Run Phillips Curve (LRPC).
Vertical line at the natural rate of unemployment, showing no trade-off between inflation and unemployment in the long run.
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is at full employment.
Define stagflation.
A situation with high inflation and high unemployment.
What are 'twin evils' in economics?
High inflation and high unemployment occurring simultaneously.
Define Aggregate Demand (AD).
The total demand for goods and services in an economy at a given price level.
Define Short-Run Aggregate Supply (SRAS).
The total quantity of goods and services firms are willing to supply at different price levels in the short run.
Define Long-Run Aggregate Supply (LRAS).
The aggregate supply when all factors of production are fully employed; represented by a vertical line.
What is a supply shock?
An event that suddenly changes the price of a commodity or service, affecting SRAS.
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.