Chapter 18

Suppose that for years East Confetti's short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 2 percentage point decline in its inflation rate. Then, during several recent years, the short-run pattern changed such that its inflation rate rose by 3 percentage points for every 1 percentage point drop in its unemployment rate. Graphically, did East Confetti's Phillips Curve shift upward or did it shift downward?

Upward

Suppose that the equation for a particular short-run AS curve is P = 20 + 0.5Q, where P is the price level and Q is real output in dollar terms. a. What is Q if the price level is 120? b. Suppose that the Q in your answer is the full-employment level of output. By how much will Q increase in the short run if the price level unexpectedly rises from 120 to 132? c. By how much will Q increase in the long run due to the price-level increase?

a. 200 b. 24 c. 0

What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? a. In the short run, __________ plays a dominant role. b. In the long run, __________ plays a larger role in determining the outcome.

a. aggregate demand b. aggregate supply

a. The Laffer Curve suggests that b. Determining the economy's location on the Laffer Curve is so important in assessing tax policy because

a. at some tax rate between 0 and 100 percent, tax revenues are maximized b.determining the optimum tax rate will produce maximum tax revenues.

Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be __________.

higher than it is now

Aggregate supply shocks can cause __________ inflation rates that are accompanied by _________ unemployment rates.

higher; higher

Suppose that firms were expecting inflation to be 3 percent, but it actually turned out to be 7 percent. Other things equal, firm profits will be:

larger than expected

Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to lower it. a. These policies might at first succeed because b. These policies might at first succeed, but eventually

a. in the short run, as aggregate demand increases, unemployment is reduced. b. in the long run, as aggregate demand increases and unemployment is reduced, workers will demand higher wages, the aggregate supply curve will shift left, and the economy will return to the natural rate of unemployment.

The graph below is an illustration of the aggregate demand-aggregate supply model. Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand-aggregate supply model above to describe these outcomes graphically. a. Aggregate demand would have shifted b. Aggregate supply (short run) would have c. Aggregate demand must have shifted ______ the shift in short-run aggregate supply

a. outward b. shifted outward c. more than

Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. a. Real GDP is below the full-employment level and prices have risen recently. b. Real GDP is above the full-employment level and prices have risen recently.

a. cost-push inflation b. demand-pull inflation