Author Question: The Federal Reserve's performance in the mid-to-late 1980s, 1990s, and early 2000s has received high ... (Read 55 times)

ARLKQ · **on:** Jun 29, 2018

The Federal Reserve's performance in the mid-to-late 1980s, 1990s, and early 2000s has received high marks from economists, even without inflation targeting.

Indicate whether the statement is true or false

Question 2

If firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and the Phillips curve?

What will be an ideal response?

connor417 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

TRUE

Answer to Question 2

Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Federal Reserve follows a contractionary monetary policy, inflation will fall. If expectations about inflation are adaptive, the contractionary monetary policy will decrease actual inflation below expected inflation. With no adjustment in nominal wages, the real wage will rise, and the unemployment rate will be pushed above its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a short-run Phillips curve.