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

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Inflation, Disinflation, and Deflation

Krugman/Wells

CHECK YOUR UNDERSTANDING

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

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
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.
3b) The costs of disinflation can be reduced if the Fed doesn’t reveal its policy to reduce inflation.
• True
• False
1b. The ______ is when monetary policy is ineffective because the nominal interest rate cannot fall below zero.
• liquidity trap
• debt deflation
• state of disinflation