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