Chapter 14

To illustrate inflation inertia

A) the expected price level; the money supply

graph question 2

A) A to B

According to the Phillips curve, other things being equal, inflation depends positively on

A) expected inflation

Demand-pull inflation is the result of

A) high aggregate demand

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will _______ the sacrifice ratio

B) lower

The imperfect-information model assumes that produces find it difficult to distinguish between changes in:

B) the overall level of prices and relative prices

Based on the Phillips curve, unexpected movements in inflation are related to ___________, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to

D) unemployment; output

The short-run aggregate supply curve is drawn for a given:

C) expected price level

According to the natural-rate hypothesis, output will be at the natural rate:

C) in the long run

Inflation inertia refers to the idea that inflation

C) keeps on going unless something acts to stop it

The rational-expectations point of view , in the most extreme case, holds that if policymakers

D) 0

Assume that an economy has the Phillips curve = -0.5(u-0.06) How many percentage point years of cyclical unemployment are needed to reduce inflation by 5 percent points

10

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

A) increase

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should _____ aggregate demand at a cost of generating _____ inflation

A) increase; higher

The assumption of rational expectations for inflation means that people will form their expectations of inflation by

A) optimally using all available information, including information about current policies, to forecast the future

According to the sticky-price model, deviations of output from the natural level are ____ deviations of the price level from the expected price level

A) positively associated with

Along a short-run aggregate supply-curve, output is related to unexpected movements in the______. Along a Phillips curve, unemployment is related to unexpected movements in the _____.

A) price level; inflation rate

The short-run Phillips curve :

A) shifts upward if expected inflation increases

The Phillips curve depends on all of the following forces except

A) the current exchange rate

In the sticky-price model, the relationship between output and the price level depends on:

A) the proportion of firms with flexible prices

The endogenous variables of the mother of all models in the Appendix to chapter 14 include the level of output

A) the real and nominal interest rates

The estimate of the sacrifice ratio from the Volcker disinflation is approximately

B) 2.5-3

graph question 1

B) A to G

According to the imperfect- information model, when the price level rises by the amount the producer expected it to rise, the producer:

B) Does not change production

If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

B) aggregate demand and aggregate supply

If price expectations are assumed to be correct, money demand is proportional to income, and net capital flow is infinitely elastic, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

B) classical open economy

The most prominent feature of the the US Economy in the 1970s was:

B) cost-push inflation

The trade-off between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation

B) equals the inflation rate

Along any aggregate supply curve, there is only one

B) expected price level

Both models of aggregate supply discussed in Ch 14 imply that if the price level is lower than expected, then output _________ the natural rate of output

B) falls below the

Economists are able to estimate the natural rate of unemployment in the United States

B) in a 95 percent confidence interval of 2 to 3 percentage points

The Philli[s curve analysis described in Chapter 14 implies that there is a negative relationship between inflation and unemployment in

B) in the short run only

Along the aggregate supply curve, if the level of output is less than the natural level of output, then the price level is

B) less than the expected price level

If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:

B) monetary policy cannot be used to systematically stabilize output

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:

B) only in the short-run

If the short-run aggregate supply curve is steep, the Phillips curve will be

B) steep

According to the imperfect-information model, in countries where there is a great deal of variability of prices:

B) the response of output to unexpected changes in prices will be relatively small

The government can lower inflation with a low sacrifice ration if the

D) public believe that policymakers are committed to reducing inflation

An economy must sacrifice 12 percent of GDP to reduce inflation

D) reduce output by 12 percent for 1 year

According to the sticky-price model:

D) some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output

Each of the following conditions will tend to reduce the sacrifice ratio except when

D) the concept of hysteresis

All of the following are requirements for reducing inflation without causing a recession except:

D) the governments budget must be balanced

The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:

D) the natural rate of unemployment may increase if unemployment is high for a long period of time

graph question 2 cont

A) AD 1 to AD 2

Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that

A) Some firms do not adjust their prices instantly to changes in demand

All of the following are ways that the modern Phillips curve differs from the relationship observed by A. W. Phillips in 1958 except that the modern Phillips curve:

A) Substitutes the output gap for unemployment

Assume that an economy has the usual type of Phillips curve except that the natural rate of unemployment in an economy is given by an average of the unemployment rates in the last two years. Then, there is:

A) a long run tradeoff between inflation and unemployment

If the equations for a country's Phillips curve is = 0.02 -0.8 (u-0.05)

A) above 2 percent (0.02)

According to the natural-rate hypothesis, the levels of output and unemployment depend on:

A) aggregate demand in the short run, but not in the long run

After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:

A) and prices are the most stable

According to the imperfect-information model, when the price level is greater than the expected price level, output will ____ the natural level of output

A) be greater than

If price expectations are assumed to be correct, money demand is proportional to income, and there are no international capital flows, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

A) classical closed economy

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output ___________ natural rate of output

A) exceeds the

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ___ the ___ in output in response to an unexpected price increase

A) greater; increase

graph 3

B

Assume that an economy has the Phillips curve = -0.5(u-0.06) Then the natural rate of unemployment is

C) 0.06

Assume that the sacrifice ration for an economy is 4

C) 20

graph question 2

C) AS 1 to AS 2

If the short-run aggregate supply curve is assumed to be horizontal and there are no international capital flows, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

C) IS-LM model

Which of the following will shift the aggregate supply curve up to the left?

C) an increase in the expected price level

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

C) basing their opinions on recently observed inflation

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to _____ in the short-run; and in the long run the expected price level will ____, causing the level of output to return to the natural level

C) decrease; decrease

Each of the two models of short-run aggregate supply is based on some market imperfection. In the imperfect-information model, the imperfection is that:

C) firms confuse changes in the overall level of prices with changes in relative prices

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, ______, and a real variable, ________

C) inflation; unemployment

Using the sticky-price model, the higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:

C) makes the short-run aggregate supply curve steeper

A recession may alter an economy's natural rate of unemployment in all of the following ways except by :

C) permanently reducing the money supply

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except

C) prices do not adjust when there is perfect competition

Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the

C) proportion of firms with flexible prices

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the

C) sacrifice ratio

In the short-run, if the price level is greater than the expected price level, then in the long run the aggregate:

C) supply curve will shift upward

The imperfect- information model bases the difference in the short-run and long-run aggregate supply curve on:

C) temporary misconceptions about prices

In the case of cost-push inflation, other things being equal:

C) the inflation rate rises but the unemployment falls

In the case of demand-pull inflation, other things being equal:

C) the inflation rate rises but the unemployment rate falls

In the 1960's, in the United States

C) the inflation rate rose but the unemployment rate fell

According to the sticky-price model, output will be at the natural level if:

C) the price level equals the expected price level

The most prominent feature of the US Economy in the 1980s was:

D) Demand-pull deflation

The basic aggregate demand supply equation implies that output exceeds natural output when the price level is

D) Greater than the expected price level

If the short-run aggregate supply curve is assumed to be horizontal, international capital flows are infinitely elastic, and the nominal exchange rate is fixed, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

D) Mundell-Fleming model with fixed exchange rate

If the short-run aggregate supply curve is assumed to be horizontal and international capital flows are infinitely elastic, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

D) Mundell-Fleming model with floating exchange rate

Cost-push inflation is the result of:

D) adverse supply shocks

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shift in the

D) aggregate demand and short run aggregate supply curves

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will

D) be horizontal

The Phillips curve expresses a short-run link

D) between nominal and real variables

The idea that the natural rate of unemployment is increased following extended period of unemployment is called

D) hysteresis

Each of the following phenomena hinders the precise estimation of the natural rate of unemployment except

D) introduction of new products such as DVD players

The relationship between short-run aggregate supply curves and Phillips curves is that there

D) is exactly one Phillips curve corresponding to each short-run aggregate supply curve

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short run aggregate supply curve shows a ___________ relationship between the price level and output

D) negative; positive

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment

D) non-accelerating inflation

The model of aggregate demand and aggregate supply is consistent with short-run monetary _______ and long-run monetary _____

D) nonneutrality; neutrality

The sacrifice ratio measures the

D) percentage of a year's real gross Domestic product that must be foregone to reduce inflation by 1 percentage point

All of the following are exogenous variables in the mother of all models except

D) price level

According to the imperfect-information model, when the price level falls because the producer did not expect it to fall, the producer:

decreases production

The NAIRU is the:

non-accelerating inflation rate of unemployment