EC102 Exam 2 Problem Set 7

A supply shock is

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve.

stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

The​ short-run Phillips curve exhibits ______, whereas the​ long-run Phillips curve shows

a trade-off between inflation and unemployment no trade-off between inflation and unemployment

It is inconsistent to believe that the​ long-run aggregate supply curve is vertical and the​ long-run Phillips curve is downward sloping because

in order for the​ long-run Phillips curve to be downward​ sloping, changes in the price level​ (inflation) would have to affect the unemployment rate in the long​ run, which does not happen with a vertical​ long-run aggregate supply curve.

In the​ figure, at what point is the inflation rate​ stable? That​ is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment?

point C

If, in the long​ run, real GDP returns to its potential​ level, then in the long​ run,

the Phillips curve is vertical.

i. An increase in the expected price level ii. An increase in​ households' expectations of their future income iii. A decrease in the price of an important natural resource iv. A decrease in​ firms' expectations of the future profitability of investment spending

1 4 2 3

i. The economy experiences a recession ii. The economy experiences​ short-term inflation iii. The economy experiences stagflation

1, 3 1, 4 1

Use the following information to draw a graph showing the​ short-run and​ long-run Phillips curves​: Natural rate of unemployment​ = 5 percent Current rate of unemployment​ = 4 percent Expected inflation rate​ = 4 percent Current inflation rate​ = 6 percent ​1) Use the line drawing tool for both the​ short-run Phillips curve and the​ long-run Phillips curve. Properly label both lines. The​ short-run and​ long-run Phillips curves intersect at the point where the inflation rate is ___ percent and the unemployment rate is ____ percent

4 percent 5 percent

Which of points​ A, B,​ C, or D can represent a​ long-run equilibrium?

A and C

Suppose that​ initially, the economy is in​ long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the​ economy, the AD curve will shift from_______ the new short-run macroeconomic equilibrium occurs at_______ long-run adjustment will shift the SRAS curve from _________ as workers adjust to lower-than-expected prices the new long-run macroeconomic equilibrium occurs at_______

AD0 to AD1 point B SRAS0 to SRAS1 point C

Which of the following best explains how the economy will adjust back to​ long-run equilibrium?

Short-run aggregate supply will decrease​ (shift leftward) as firms and workers adjust to the new price level.

Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. The new​ short-run equilibrium will be at point.... The​ long-run equilibrium point will be at point....

D C

Which of the following best explains how the economy will adjust from the​ short-run equilibrium point to the new​ long-run equilibrium​ point?

Due to the higher price​ level, workers will demand higher​ wages, and firms will raise prices and cause SRAS to shift to the left to point C.

Which of the following best explains how and why the economy will adjust back to​ long-run equilibrium?

Short-run aggregate supply will increase​ (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.

Suppose that the expected inflation rate increases from 4 percent to 6 percent. What will happen to the​ short-run Phillips​ curve?

The​ short-run trade-off between unemployment and inflation will be worse than before as the economy moves to a higher​ short-run Phillips curve.

In the​ figure, expected inflation is initially at​ 1.5%. When expected inflation increases to​ 4.5%, which of the following will​ occur?

Unemployment reaches the natural rate of​ 5%. At the natural rate of​ unemployment, inflation is​ 4.5%. To have​ 3.5% unemployment​ rate, inflation would be​ 7.5%.

Which one of the following is not true when the economy is in macroeconomic​ equilibrium?

When the economy is at​ long-run equilibrium, firms will have excess capacity.

An article in the Wall Street Journal noted that real GDP in Greece declined during 2016. The article stated that economists​ "attributed it to a​ 2.1% decline in​ [government spending] and weaker net​ exports." Use a basic aggregate demand and aggregate supply graph​ (with LRAS​ constant) to explain what happened in Greece in 2016. Assume the economy is initially in​ long-run equilibrium. The.... curve will shift to the.... The new​ short-run equilibrium will be where... to adjust back to the long-run equilibrium, the ..... curve will shift to the... the new long-run equilibrium will be where...

aggregate demand left the new aggregate demand curve intersects the original​ short-run aggregate supply curve. short-run aggregate supply right the new aggregate demand curve intersects the new​ short-run aggregate supply curve at the original​ long-run aggregate supply curve.

After the adjustment of aggregate supply is​ complete, the economy returns to equilibrium

at point A

The graph shows the economy in​ long-run equilibrium at point A. Now assume that there is a large increase in demand for U.S. exports. ​1.) Use the line drawing tool to show the resulting​ short-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve as AD2​, SRAS2 or LRAS2 as appropriate. ​2.) Use the point drawing tool to locate the new​ short- run equilibrium point. Label this point B. Now consider the adjustment of the economy back to​ long-run equilibrium. ​3.) Use the line drawing tool to show the resulting​ long-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve appropriately. ​4.) Use the point drawing tool to locate the new​ long- run equilibrium point. Label this point C. At the new short run​ equilibrium, the unemployment rate will... compared to the employment rate at the initial equilibrium, prior to the increase in exports.

be lower

Stagflation is a

combination of inflation and recession

In the​ graph, the economy is in​ long-run equilibrium at point A. ​Now, assume that there is an unexpected increase in the price of oil. ​1.) Use the line drawing tool to show the resulting​ short-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve as AD2 SRAS2 or LRAS2 as appropriate. ​2.) Use the point drawing tool to locate the new​ short- run equilibrium point. Label this point B. In the new​ short-run equilibrium, the unemployment rate is .... the unemployment rate in the initial equilibrium prior to the increase in the price of oil.

higher than

Given that the Phillips curve is derived from the aggregate demand and aggregate supply​ model, why use the Phillips​ curve? The answer is that while the aggregate demand and aggregate supply model shows the...., the Phillips curve explicitly shows the.... Further, the aggregate demand and aggregate supply model explicitly shows changes in the...., while the Phillips curve explicitly shows the....

price level inflation rate level of real GDP unemployment rate

At the new​ long-run equilibrium,

real GDP and the unemployment rate will remain the​ same, but price level will be higher compared to the initial​ equilibrium, prior to the increase in exports.

When the economy returns to​ long-run equilibrium​ again,

real​ GDP, the unemployment​ rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.

Suppose the economy enters a recession. If government policymakers-​Congress, the​ president, and members of the Federal Reserve-do not take any policy actions in response to the​ recession, what is the likely​ result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long​ run? i. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.

statement ii is correct