Macro Chapter 14

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in: A) both the short run and the long run. B) only in the short run. C) only in the long run. D) in neither the short run nor the long run.

B

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio. A) raise B) lower C) not change D) sometimes raise and sometimes lower

B

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output ______ natural rate of output. A) exceeds the B) falls below the C) equals the D) moves to a different

B

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. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

C

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on: A) sticky wages. B) sticky prices. C) temporary misperceptions about prices. D) procyclical real wages.

C

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the: A) NAIRU. B) short-run Phillips curve. C) sacrifice ratio. D) Okun's law.

C

According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer: A) increases production. B) does not change production. C) decreases production. D) hires more workers.

C

According to the natural rate hypothesis, output will be at the natural rate: A) if inflation exceeds expected inflation. B) if inflation falls below expected inflation. C) in the long run. D) if aggregate demand affects output in the long run.

C

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP. A) 4 B) 5 C) 20 D) 40

C

In the short-run, if the price level is greater than the expected price level, then in the long run the aggregate: A) demand curve will shift leftward. B) demand curve will shift rightward. C) supply curve will shift upward. D) supply curve will shift downward.

C

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 B) negatively associated with C) not related to D) equal to

A

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 B) increase; lower C) decrease; higher D) decrease; lower

A

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. B) no long-run tradeoff between inflation and unemployment. C) no short-run tradeoff between inflation and unemployment. D) a sacrifice ratio that is large but not infinite.

A

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 B) falls below the C) equals the D) moves to a different

A

In the sticky-price model, the relationship between output and the price level depends on: A) the proportion of firms with flexible prices. B) the target real wage rate. C) the target nominal wage rate. D) the implicit agreements between workers and firms.

A

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: A) monetary policy can be used to systematically stabilize output. B) monetary policy cannot be used to systematically stabilize output. C) a policy of keeping the money supply constant is optimal. D) a policy of adjusting the money supply in response to the state of the economy is optimal.

B

Inflation inertia refers to the idea that inflation: A) is always present in economies. B) keeps on going unless something acts to stop it. C) cannot be reduced unless unemployment is increased. D) can be generated by either demand-pull or cost-push forces.

B

The imperfect-information model assumes that producers find it difficult to distinguish between changes in: A) real wages and nominal wages. B) the overall level of prices and relative prices. C) the overall level of prices and the expected level of prices. D) cost-push inflation and demand-pull inflation.

B

Each of the following conditions will tend to reduce the sacrifice ratio except when: A) workers and firms set wages and prices based on rational expectations. B) policymakers make credible commitments to policy changes. C) announcements of policy changes are made before workers and firms have formed expectations. D) the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.

D

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the: A) aggregate demand curve. B) short-run aggregate supply curve. C) long-run aggregate supply curve. D) aggregate demand and short-run aggregate supply curves.

D

The basic aggregate supply equation implies that output exceeds natural output when the price level is: A) low. B) high. C) less than the expected price level. D) greater than the expected price level.

D

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called: A) Okun's law. B) the cold-turkey approach. C) the natural-rate hypothesis. D) hysteresis.

D

The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______. A) neutrality; neutrality B) nonneutrality; nonneutrality C) neutrality; nonneutrality D) nonneutrality; neutrality

D

The most prominent feature of the U.S. economy in the 1980s was: A) cost-push inflation. B) cost-push deflation. C) demand-pull inflation. D) demand-pull deflation.

D

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately: A) 5. B) 2.8. C) 1. D) 0.

D

The relationship between short-run aggregate supply curves and Phillips curves is that there: A) is no relationship between short-run aggregate supply curves and Phillips curves. B) are several short-run aggregate supply curves for each Phillips curve. C) are several Phillips curves for each short-run aggregate supply curve. D) is exactly one Phillips curve corresponding to each short-run aggregate supply curve.

D