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# Krugman/Wells PowerPoint PPT Presentation

16. >>. Inflation, Disinflation, and Deflation. Krugman/Wells. CHECK YOUR UNDERSTANDING. Check Your Understanding 16-1 Questions 1 and 2.

Krugman/Wells

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16

>>

Inflation, Disinflation, and Deflation

Krugman/Wells

### Check Your Understanding 16-1Questions 1 and 2

1) Suppose there is a large increase in the money supply in an economy that previously had low inflation. As a consequence, output expands in the short run. Does this disprove the classical model?

• Yes

• No

### 2) Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?

• yes

• no

1*) Use Okun’s Law to predict the unemployment rate when the natural rate of unemployment is 5.2% and the output gap is -10%.

• 10.2%

• 4.8%

• -4.8%

• 0

Check Your Understanding 16-2Questions 1 and 2

1) The short-run Phillips curve illustrates the negative relationship between cyclical unemployment and the actual inflation rate for a given level of the expected inflation rate.

• True

• False

• True

• False

### 1) There is a trade-off between unemployment and inflation in both the short run and the long run.

• True

• False

2) British economists believe that the natural rate of unemployment rose from 3% to 10% during the 1970s. During that period Britain experienced a sharp acceleration of inflation. This may have been caused by positive supply shocks.

• True

• False

### 3a) Disinflation is costly because in order to reduce the inflation rate:

• unusually high inflation is necessary for a time.

• unsustainably large increases in output are necessary.

• taxes must increase.

• unemployment usually must increase above the natural rate.

• True

• False

• yes

• no

### 1b. The ______ is when monetary policy is ineffective because the nominal interest rate cannot fall below zero.

• liquidity trap

• debt deflation

• state of disinflation