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Macroeconomics

Glenn Hubbard, Tony O'Brien

Chapter 17

Inflation, Unemployment, and Federal Reserve Policy

Educators

EA

Problem 1

What is the Phillips curve? Draw a graph of a short-run Phillips curve.

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Erwin A.
Numerade Educator

Problem 2

What actions should the Fed take if it wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation?

EA
Erwin A.
Numerade Educator

Problem 3

Why did economists during the early 1960 s think of the Phillips curve as a "policy menu"? Were think of the think of it in this way? Briefly explain.

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Erwin A.
Numerade Educator

Problem 4

Why did Milton Friedman argue that the Phillips curve did not represent a permanent trade-off between unemployment and inflation? In your answer, be sure to explain what Friedman meant by the "natural rate of unemployment."

EA
Erwin A.
Numerade Educator

Problem 5

Use these two graphs to answer the following questions.
GRAPH
a. Briefly explain which point on the Phillips curve graph best represents the same economic situation as point $\mathrm{B}$ on the aggregate demand and aggregate supply graph.
b. Briefly graph. griefly explain which point on the Phillips curve graph best represents the same economic situation as point $C$ on the aggregate demand and aggregate sup- ply graph.

EA
Erwin A.
Numerade Educator

Problem 6

Given that the Phillips curve is derived from the aggregate demand and aggregate supply model, why do we use the Phillips curve analysis? What benefits does the Phillips curve analysis offer compared to the aggregate demand and aggregate supply model?

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Erwin A.
Numerade Educator

Problem 7

In macroeconomics courses in the 1960 s and early 1970 s, some economists argued that one of the U.S. political parties was willing to have higher unemployment in order to achieve lower inflation and that the other major political party was willing to have higher inflation in order to achieve lower unemployment. Why might such views of the trade-off between inflation and unemployment have existed in the 1960 s? Why are such views rare today?

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Erwin A.
Numerade Educator

Problem 8

The text discussed how if Ford and the UAW fail to accurately forecast the inflation rate, the real wage will be different than the company and the union expected. Why, then, do the company and the union sign long-term contracts rather than negotiate a new contract each year?

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Erwin A.
Numerade Educator

Problem 9

General Juan Perón, the former dictator of Argentina, once said of the labor market in his country: "Prices have gone up the elevator, and wages have had to use the stairs." In this situation, what was happening to real wages in Argentina? Was unemployment likely to have been relatively high or relatively low?

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Erwin A.
Numerade Educator

Problem 10

An article in the Wall Street Journal has the headline "Don't Look Now, but Market Inflation Expectations Are Falling." If inflation turns out to be lower than households and firms had previously expected, will the actual real wage end up being higher or lower than the expected real wage? Will employment in the short run end up being higher or lower? Briefly explain.

EA
Erwin A.
Numerade Educator

Problem 11

(Related to the Making the Connection on page 608 ) Robert Shiller asked a sample of the general public and a sample of economists the following question: "Do you agree that preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools?" Fifty-two percent of the general public, but only 18 percent of cconomists, fully agreed. Why does the general public believe inflation is a bigger problem than economists do?

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Erwin A.
Numerade Educator

Problem 12

(Related to the Making the Connection on page 608 ) When Robert Shiller asked a sample of the general public what they thought caused inflation, the most frequent answer he received was "corporate greed." Do you agree that greed causes inflation? Briefly explain.

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Erwin A.
Numerade Educator

Problem 13

(Related to the Chapter Opener on page 603 ) In its 2014 Anmual Report, Goodyear noted, - The increasing strength of the U.S. dollar created unfavorable foreign currency translation for many of our businesses around the world."
a. What did the company mean by the "increasing strength of the U.S. dollar"?
b. What did it mean by an "unfavorable foreign currency translation"?
c. During this period was Fed policy attempting to reach a point on the short-run Phillips curve representing higher unemployment and lower inflation, or a point representing higher inflation and lower unemployment? Briefly explain.
d. What connection is there between Fed policy and this statement in Goodyear's annual report?

EA
Erwin A.
Numerade Educator