Macro Economics Chapter 15, ch14**, Chapter 14 MACRO, Ch. 14, ECON 102: Chapter 14, Macro Final

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:

0

Along a short - run Phillips​ curve, the A. short−run cost of lower unemployment is higher inflation B. short-run benefit of lower unemployment is lower inflation C. short-run cost of higher inflation is a higher real interest rate D. long-run cost of lower inflation is higher unemployment E. short-run cost of lower inflation is higher interest rates

A

A country reports that its inflation rate and unemployment rate have both increased. These changes could be the result of A. a movement downward along the short−run Phillips curve. B. an upward shift of the short−run Phillips curve. C. a movement upward along the short-run Phillips curve. D. a downward shift of the short−run Phillips curve. E. a leftward shift of the long−run Phillips curve.

B

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

Lower

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will: be vertical. be steeper than it would be if some firms had flexible prices. be horizontal. slope upward to the right.

be horizontal.

The Phillips curve expresses a short-run link:

between nominal and real variables.

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

both the inflation rate and the unemployment rate rise at the same time.

The most prominent feature of the U.S. economy in the 1970s was:

cost-push 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.

decrease; decrease

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

decreases production.

The most prominent feature of the U.S. economy in the 1980s was:

demand-pull deflation.

Phillips curve

derived from the SRAS curve § states that inflation depends on § expected inflation § cyclical unemployment § supply shocks § presents policymakers with a short-run tradeoff between inflation and unemployment

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

does not change production.

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer: does not change production. hires more workers. decreases production. increases production.

does not change production.

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

equals the inflation rate.

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:

makes the short-run aggregate supply curve steeper.

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

sacrifice ratio.

The short-run Phillips curve:

shifts upward if expected inflation increases.

The short-run Phillips curve: shifts upward if expected inflation increases. shifts upward if expected inflation decreases. is vertical. shifts downward if expected inflation increases.

shifts upward if expected inflation increases.

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will result in a loss of output that is ______ than expected based on the sacrifice ratio. smaller larger sometimes larger and sometimes slower the same

smaller

According to the sticky-price model:

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

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:

some firms do not adjust their prices instantly to changes in demand.

§ the natural rate hypotheses

states that changes in aggregate demand can affect output and employment only in the short run

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

steep

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:

substitutes the output gap for unemployment.

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

supply curve will shift upward.

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

temporary misperceptions about prices.

The Phillips curve depends on all of the following forces except:

the current exchange rate.

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in .______

the expected price level; the money supply

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

the inflation rate rises but the unemployment rate falls

Comparing the aggregate supply curve and the short − run Phillips​ curve, we see that they A. both exist because money wage rates are fixed in the short run. B. describe the same phenomena but contradict each other. C. both exist since money wages are flexible. D. each describe different parts of the economy. E. both exist because real wage rates are fixed in the short run.

A

Moving along a short−run Phillips​ curve, a reduction in the unemployment rate is achieved by A. increasing the inflation rate. B. running a federal budget deficit. C. shifting the aggregate supply curve leftward. D. increasing potential GDP. E. reducing the size of the labor force.

A

The long−run Phillips curve represents the relationship between the inflation rate and the unemployment rate when there is no​ ________ unemployment. A. cyclical B. structural C. seasonal D. natural E. frictional

A

The short - run Phillips curve is A. downward sloping B. u-shaped C. upward Sloping D. horizontal at a constant rate of inflation E. vertical at a constant rate of unemployment

A

Exhibit: AD-AS Shifts

A to B

(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

The expected inflation rate is the inflation rate that people forecast and use to help set A. the natural rate of unemployment. B. the real wage rate. C. the money wage rate. D. the price level. E. real GDP.

C

When an economy experiences a recession there is A. a leftward shift of the short−run Phillips curve. B. no change in the short−run Phillips curve. C. a downward movement along the short−run Phillips curve. D. a rightward shift of the short−run Phillips curve. E. an upward movement along the short−run Phillips curve.

C

When the expected inflation rate​ ________, the short − run Phillips curve​ ________. A. ​falls; shifts upward B. rises; shifts downward C. ​rises; shifts upward D. falls; does not shift E. rises; might shift upward or downward depending on how the long−run Phillips curve shifts

C

The​ long-run Phillips curve is a vertical line because A. the natural unemployment rate only depends on the inflation rate. B. real GDP does not depend on the unemployment rate. C. in the long​ run, the natural unemployment rate increases when inflation increases. D. there is no relationship between the natural unemployment rate and the inflation rate. E. the unemployment rate decreases when the inflation rate increases.

D

A rational expectation of the inflation rate is A. always correct. B. an expected inflation rate between 1 percent and 5 percent. C. a forecast based only on the historical evolution of inflation over the last 100 years. D. an expected inflation rate between 5 percent and 10 percent. E. a forecast based on the forecasted actions of the Fed and other relevant determinant factors.

E

An increase in aggregate demand results in A. an increase in real GDP and a decrease in the price level. B. a decrease in real GDP and a decrease in the price level. C. a lower unemployment rate and a lower price level. D. a higher unemployment rate and a lower price level. E. a lower unemployment rate and a higher price level.

E

Because money growth is a major component determining the inflation​ rate, in order to forecast inflation we should forecast actions by the A. Office of the Treasury. B. U.S. Mint. C. President. D. Congress. E. Fed.

E

If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment​ rate, in the long run the SRPC​ ________ and the LRPC​ ________. A. does not​ change; does not change B. shifts​ downward; shifts leftward C. does not​ change; shifts rightward D. shifts​ downward; does not change E. shifts​ upward; does not change

E

On the long − run Phillips​ curve, the unemployment rate A. decreases when the inflation rate increases. B. can be any value but the inflation rate equals the expected inflation rate. C. and inflation rate can take any value. D. equals the natural unemployment rate and the inflation rate equals the expected inflation rate. E. equals the natural unemployment rate but the inflation rate can be any value.

E

(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

a lower rate of inflation for any level of unemployment.

If the equation for a country's Phillips curve is π = 0.02 - 0.8(u - 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

above 2 percent (0.02)

Cost-push inflation is the result of:

adverse supply shocks.

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

aggregate demand and short-run aggregate supply curves.

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

aggregate demand and short-run aggregate supply curves.

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

an increase in the expected price level

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

and prices are most stable.

§ rational expectations

based on all available information § implies that disinflation may be painless

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

basing their opinions on recently observed inflation.

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

be greater than

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation: equals the inflation rate of the previous year. equals the inflation rate. is below the inflation rate. exceeds the inflation rate.

equals the inflation rate.

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.

exceeds the

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

expected inflation.

According to the Phillips curve, other things being equal, inflation depends positively on: the unemployment rate. the rate of technological change. expected inflation. the quantities of capital and labor.

expected inflation.

Along any aggregate supply curve, there is only one:

expected price level.

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

expected price level.

The short-run aggregate supply curve is drawn for a given: output level. expected price level. level of aggregate demand. price level.

expected price level.

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.

falls below the

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:

firms confuse changes in the overall level of prices with changes in relative prices.

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

greater than the expected price level.

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. greater; decrease greater; increase smaller; decrease smaller; increase

greater; increase

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.

greater; increase

Demand-pull inflation is the result of:

high aggregate demand.

The long-lasting influence of history on variables such as the natural rate of unemployment is called _________________________________.

hysteresis

According to the natural-rate hypothesis, output will be at the natural rate: if aggregate demand affects output in the long run. if inflation exceeds expected inflation. if inflation falls below expected inflation. if inflation meets expectations in the short run.

if inflation meets expectations in the short run.

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

in the short run only.

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

inflation; unemployment

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

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

Inflation inertia refers to the idea that inflation:

keeps on going unless something acts to stop it.

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

less than the expected price level.

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is: less than the expected price level. stuck at the existing price level. equal to the natural price level. greater than the expected price level.

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

monetary policy cannot be used to systematically stabilize output.

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.

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.

nonaccelerating inflation

The NAIRU is the:

nonaccelerating inflation rate of unemployment.

The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______.

nonneutrality; neutrality

both sticky price and imperfect information model imply that

output rises above its natural rate when the price level rises above the expected price level.

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

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 ______.

price level; inflation rate

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 ______. inflation rate; price level price level; level of output price level; inflation rate unemployment rate; price level

price level; inflation rate

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

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:

proportion of firms with flexible prices.

The government can lower inflation with a low sacrifice ratio if the: money supply is reduced slowly. public rationally believe that policymakers are committed to reducing inflation. short-run aggregate supply schedule is relatively flat. public has adaptive expectations.

public rationally believe that policymakers are committed to reducing inflation.

The approach that assumes that people optimally use all available information to forecast the future is called _________________________________ expectations.

rational

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

sacrifice ratio

In the case of demand-pull inflation, other things being equal: the unemployment rate rises but the inflation rate falls. the inflation rate rises but the unemployment rate falls. both the inflation rate and the unemployment rate rise at the same time. both the inflation rate and the unemployment rate fall.

the inflation rate rises but the unemployment rate falls.

In the 1960s, in the United States:

the inflation rate rose but the unemployment rate fell.

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

the overall level of prices and relative prices.

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

the price level equals the expected price level.

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

the proportion of firms with flexible prices.

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

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

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 ______.

unemployment; output

adaptive expectations

§ based on recently observed inflation § implies "inertia"

hysteresis

§ states that aggregate demand can have permanent effects on output and employment