Briefly discuss some of the short-term options the Phillips curve gives policy makers and provide examples of how at least two of these options might be used.
What will be an ideal response?
Student responses will vary but should accurately exemplify some of the options the Phillips curve gives to policy makers. In the short-run, the Phillips curve offers policy makers a menu of alternatives. Expansionary and contractionary monetary and fiscal policy can change aggregate demand, triggering a movement along the short-run aggregate supply curve. These policies can also be represented as moving the economy along a Phillips curve. For example, an increase in the money supply, an increase in government purchases and/or a tax cut could cause an increase in aggregate demand and move the economy to a point on the Phillips curve with lower unemployment but higher inflation. A decrease in the money supply, reductions in government purchases and/or increases in taxes could move the economy to a point with lower inflation and higher unemployment.
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If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?
A) an increase in the value of the dollar relative to other currencies B) a decrease in business confidence C) an increase in wealth D) an increase in interest rates
Which of the following would decrease the current account balance of the United States?
A) a decrease in the amount of money the U.S. government sends in foreign aid to other countries B) a decrease in imports C) a decrease in the amount of income U.S. companies pay out to foreigners who own investments in the U.S. D) a decrease in the balance of trade
The demand for U.S. dollars originates from all of the following except
A. Foreign demand for U.S. investments. B. U.S. demand for imported goods. C. Speculation in U.S. dollars. D. Foreign demand for U.S. exports.
Another way to describe the growth rate of spending is:
A. the growth rate of real GDP. B. the growth rate of nominal GDP. C. the growth rate of the velocity of money. D. the growth rate of the money supply.