Chapter 14

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 long-run tradeoff between inflation and unemployment.

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

be horizontal

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

demand-pull deflation

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

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

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

the inflation rate rises but the unemployment rate falls.

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.

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

expected inflation

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

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; increase

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

in the long run

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

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

lower

The government can lower inflation with a low sacrifice ratio if the:

public believes that policymakers are committed to reducing inflation.

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

sacrifice ratio

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; ouput