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Short-run Phillips curve, Downward sloping, Monetary Policy, Principles of Macroeconomics

The key words in this Macroeconomics course include short-run Phillips curve, Downward sloping, Horizontal, Vertical, Monetary Policy, Inflation, Price Level, Real GDP, Higher Output, Lower Employment,

The short-run Phillips curve is ________________ and the long-run Phillips curve is ________________.

downward sloping; horizontal

upward sloping; vertical

upward sloping; horizontal

downward sloping; vertical

Explanation : In the short run, there is a potential trade-off between inflation and unemployment. As inflation rises, unemployment falls, and vice-versa. Thus, the short-run Phillips curve is downward sloping.

In the long run, monetary policy is neutral. In other words, it does not impact real variables like unemployment. Thus, if you increase the money supply, it will increase the price level, but it will have no impact on unemployment. Therefore, the long-run Phillips Curve is vertical at the natural rate of output (u*).

The graph below shows both curves.

Which of the following describes the expected outcome of expansionary monetary policy in the short run?

higher employment, higher output, and a higher price level

higher employment, higher output, and a lower price level

lower employment, higher output, and a higher price level

lower employment, lower output, and a lower price level

Explanation : The actions of the central bank to increase the money supply should cause an increase in the aggregate demand curve. By shifting this curve in the aggregate demand–aggregate supply graph, a new short run equilibrium will result. This causes real GDP, or total output, to increase. To accomplish this, more workers are employed, resulting in higher employment levels. Comparing the old price level to the new price level will also reveal that the price level has risen.

Which of the following limits the impact of monetary policy?

recession is a result of depressed aggregate demand rather than aggregate supply.

aggregate supply changes always lead to lower real GDP.

people adjust their expectations of inflation.

money is neutral in the short run.

Explanation : Monetary policy only affects aggregate demand, so if there is a change in aggregate supply, monetary policy will be of little help to restore an economy.
In the long run, there are ways to mitigate the impact of monetary policy. Thus, in the long run we say money is neutral; monetary policy doesn’t change real variables. Given enough time, people adjust their expectations so that changing the money supply through monetary policy doesn’t lower or raise real GDP or unemployment.

Which of the following statements is true? (assuming expected inflation is built into contracts)

lenders of loanable funds will benefit when inflations is greater than expected

borrowers of loanable funds benefit when inflation is less than expected

suppliers of labor and other inputs are hurt when inflation is greater than expected

purchasers of labor and other inputs benefit when inflation is less than expected

Explanation : Purchasers of labor and other inputs, along with borrowers of loanable funds are hurt when inflation is less than anticipated, because they end up paying more in real terms than they intended to. Lenders of loanable funds and suppliers of labor and other inputs are hurt when inflation is greater than anticipated because the real value of what they are selling or getting paid back is less than they thought it was going to be.

Which of the following variables are affected by monetary policy in the long run?

real GDP

the tax rate

price level


Explanation : After monetary policy is implemented, and the aggregate demand curve shifts and a new price level prevails. In the short run, a firm may not be able to adjust to this new level of prices for their inputs, but given time, firms alter their production levels consistent with the new prices. This causes the short-run aggregate supply curve to shift. The SRAS curve will shift in the opposite direction resulting in a return to the long run equilibrium level of output and employment.