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

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16

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Inflation, Disinflation, and Deflation

Krugman/Wells

CHECK YOUR UNDERSTANDING

slide3

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
slide4
2) Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?
  • yes
  • no
slide6

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
slide8

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
1) There is a trade-off between unemployment and inflation in both the short run and the long run.
  • True
  • False
slide12

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
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.
slide14
3b) The costs of disinflation can be reduced if the Fed doesn’t reveal its policy to reduce inflation.
  • True
  • False
slide17
1b. The ______ is when monetary policy is ineffective because the nominal interest rate cannot fall below zero.
  • liquidity trap
  • debt deflation
  • state of disinflation
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