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Macroeconomics Ch 17

Swalaheen. Inflation, unemployment, and federal reserve policy.

QuestionAnswer
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.
Phillips Curve A curve showing the short-run relationship between the unemployment rate and the inflation rate.
Structural Relationship A relationship that depends on the basic behavior of consumers and firms and that remains unchanged over long periods.
T/F: The Phillips Curve does NOT represent a permanent trade-off between unemployment and inflation. TRUE.
Natural Rate of Unemployment The unemployment rate that exists when the economy is at potential GDP.
T/F: The long-run Phillips Curve is a vertical line at the natural rate of unemployment. TRUE.
How do you calculate Real Wage? Nominal Wage /Price Level x 100 = Real Wage
If actual inflation is greater than expected inflation... The actual wage is less than the expected real wage, and the unemployment rate falls.
If actual inflation is less than expected inflation... The actual real wage is greater than the expected real wage and the unemployment rate rises.
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.
Nonaccelerating inflation rate of unemployment (NAIRU) The unemployment rate at which the inflation rate has no tendency to increase or decrease.
T/F: In the long-run the Federal Reserve can affect the inflation rate but not the unemployment rate. TRUE.
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
Rational Expectations Expectations formed by using all available information about an economic variable.
Real Business cycle models Models that focus on real rather than monetary explanations or fluctuations in real GDP.
Disinflation A significant reduction in the inflation rate.
Created by: KAzetapi
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