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At the end of the 2nd quarter, the unemployment rate in the U.S. was 6%. The Federal Reserve has stated that it will conduct monetary policy to bring down this unemployment rate during the 3rd quarter. Suppose that the natural rate of unemployment is 6%, the value of a is one, and the public expects an inflation of 3%. According to the given information, which of the answer choices correctly gives values of actual inflation that would support Phillips’s theory and Friedman’s theory, respectively?

1.Phillips: 1%; Friedman: 1%

2.Phillips: 2%; Friedman: 6%

3.Phillips: 4%; Friedman: 3%

4.Phillips: 5%; Friedman: 8%

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Related questions

1) In 1958, A.W. Phillips stated that inflation and unemployment are correlated. In 1972, Milton Friedman stated that Phillips' relationship was only temporary, and thus only applicable in the short-run. Friedman contended that people will over time anticipate the correct value of inflation and in the meantime adjust their actions accordingly. These expectations mitigate policymakers' attempts to control unemployment through inflationary policies. Thus, Friedman believed that in the long-run, there is no relationship between inflation and unemployment. Friedman's analysis of inflation and unemployment is summarized by the following equation: equation, where a is a positive constant, and the natural rate of unemployment is the normal unemployment that an economy experiences because people are continually quitting and searching for jobs.

Which of the answer choices is Phillips' theory regarding inflation and unemployment?

A. More people working in an economy correlates to more expensive goods and services.

B. Fewer people looking for work in an economy correlates to cheaper goods and services.

C. More people looking for work in an economy correlates to more expensive goods and services.

D. Fewer people working in an economy correlates to more expensive goods and services.

2) At the end of 2014, the unemployment rate in the U.S. was 5%. The Federal Reserve has stated that it will conduct monetary policy to bring down this unemployment rate during 2015. Suppose that the natural rate of unemployment is 6%, the value of a is one, and the public expects inflation of 4%. According to the given information, which of the answer choices correctly gives values of actual inflation that would support Phillips's theory and Friedman's theory, respectively?

A. Phillips: 6%; Friedman: 5%

B. Phillips: 7%; Friedman: 6%

C. Phillips: 5%; Friedman: 2%

D. Phillips: 3%; Friedman: 4%

1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

  interest rate rises; investment falls
  interest rate rises; investment rises
  interest rate falls; investment rises
  interest rate falls; investment falls

2. The main goal of monetary policy is to shift

  AD.
  SRAS.
  LRAS.
  both AD and SRAS.
  both AD and LRAS.

3. Which of the following is true regarding the effects of an expansionary monetary policy?

  Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.
  Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.
  Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.
  Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

  You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.
  You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.
  You, the owner of an airline company, sign a two-year contract for airline fuel.
  You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

  real GDP and price level.
  price level and inflation rate.
  unemployment rate and inflation rate.
  unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

  The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.
  The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.
  Both the short-run and long-run Phillips curves are downward sloping.
  Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?

Year Actual Inflation rate
2010 0%
2011 0%
2012 3%
2013 3%
2014 6%
2015 6%
   
  6% and 3%
  6% and 9%
  6% and 12%
  9% and 6%
  3% and 6%

8. Which of the following can change relatively quickly in the short-run?

  the price of a latte in a coffee shop
  the salary of a finance professor
  the rent paid for a store

Please read the following article from MoneyNews.com: http://www.moneynews.com/StreetTalk/Bullard-Unemployment-Inflation-Fed/2014/07/09/id/581767/.

The focus of the article is a predicted rise in the rate of inflation, driven partially by a drop in the unemployment rate. How does this relate to our studies of inflation and unemployment, especially the Phillips Curve?

Do you see examples in your own life that support the author's holding? Do you agree with the premise of the article? Why or why not?

Article:

Bullard: Falling Unemployment Will Push Inflation Above Fed Target.

< >Share0

Federal Reserve Bank of St. Louis President James Bullard said a surprisingly fast drop in unemployment will fuel inflation, bolstering his case for an interest-rate increase early next year.

I think we are going to overshoot here on inflation, Bullard said Wednesday in a telephone interview from St. Louis. He predicted an inflation rate of 2.4 percent at the end of 2015, well above the Feds 2 percent target.

That is a break from where most of the committee seems to be, which is a very slow convergence of inflation to target, he said in a reference to the policy-making Federal Open Market Committee.

A drop in the jobless rate to 6.1 percent in June, the lowest level in almost six years, increases pressure on the Fed to raise the main interest rate sooner than most officials have estimated, Bullard said.

The St. Louis Fed chief, who calls himself the North Pole of inflation hawks, estimates full employment at about 6 percent. A lower level may stoke wage and price pressures, he said.

When unemployment goes into the five range, that is going to below the natural rate, or the level at which inflation is neither speeding up nor slowing down, Bullard said.

Inflation has been unusually low in 2013 and the first part of 2014 because of temporary circumstances such as European economic weakness.

Those special factors are wearing off, and the economy is on the upswing, Bullard said. Those factors will send the inflation rate above the target in 2015.

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