Ch 14

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

be horizontal

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

As a result of a contraction in aggregate demand, the ________ declines, but over time it returns to its former level as the expected price level ______

level of output, falls

The sticky-price model of aggregate supply explains why

output declines when prices fall below expected prices

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

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

public rationally believe that policymakers are committed to reducing inflation.

A central bank can reduce inflation at the smallest cost if people's expectations of inflation

quickly respond to new policy regimes

An increase in the expected price level shifts

the short-run aggregate supply curve to the left

A rightward shift in aggregate _______ moves the economy along the short-run Phillips curve to a point with _______ inflation.

demand, higher

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

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

equals inflation rate

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

if inflation meets expectations in the short run

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

sacrifice ratio

The short-run Phillips curve:

shifts upward if expected inflation increases.

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

smaller

A rightward shift in aggregate _______ shifts the short-run Phillips so the economy experiences _________ inflation for any level of unemployment.

supply, lower

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

the inflation rate rises but the unemployment rate falls