Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain
What will be an ideal response?
To reduce inflation, the Federal Reserve must reduce the money supply, which results in higher interest rates. When interest rates increase, consumption and firm investment fall, resulting in a decrease in aggregate demand and, as the short-run Phillips curve shows, an increase in the level of unemployment in the short run. This result indicates that the Fed cannot simultaneously reduce inflation and unemployment. However, if people immediately revise their inflation expectations once the Fed announces a change in monetary policy, the announcement on contraction in the money supply will move the economy down its long-run Phillips curve to a lower rate of inflation with no change in the unemployment rate. In that case, it would be possible to reduce inflation with no increase in unemployment.
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If the government places a new tax on the firing of workers, then we would expect
a. both the short run and long run Phillips curve to shift to the right. b. both the short run and long run Phillips curve to shift to the left. c. the long run Phillips curve remains unchanged while the short run Phillips curve shifts to the right. d. the short run Phillips curve remains unchanged while the long run Phillips curve shifts to the right. e. none of the above.
Rationing of resources, goods, and services
A) is not required under the price system. B) is required because of scarcity. C) must be done by the government. D) happens only when the price is zero.
The central question in economics is how to
a. make the best use of scarce resources. b. use government planning agencies. c. induce people to want less. d. increase human knowledge.
Increases in the overall price level:
A. reduce people's real wealth. B. mean that a given number of dollars can buy as much in terms of real goods and services as before. C. tends to cause people to increase their consumption. D. result in an increase people's dollar-denominated wealth.