ECON 305 CH 14

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 1. 2.8. 5.

0

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP. 5 20 4 40

20

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

be horizontal.

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

does not change production.

Exhibit: AD-AS Shifts Reference: Ref 14-1 (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 A to D A to B A to C

A to G

Short-run Phillips Curve Reference: Ref 14-3 (Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face: a higher rate of inflation for any level of unemployment. higher than expected inflation rates and lower unemployment rates. a lower rate of inflation for any level of unemployment. the same tradeoff between inflation and unemployment.

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) below 2 percent (0.02) 2 percent (0.02) -2 percent (-0.02)

above 2 percent (0.02)

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

aggregate demand and short-run aggregate supply curves.

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by: asking the opinions of experts. basing their opinions on recently observed inflation. flipping a coin. taking all information into account using the best economic model available.

basing their opinions on recently observed inflation.

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. is below the inflation rate. equals the inflation rate of the previous year. exceeds the inflation rate.

equals the inflation rate.

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

expected inflation.

The short-run aggregate supply curve is drawn for a given: level of aggregate demand. expected price level. price level. output 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. equals the Falls below the exceeds the moves to a different

falls below the

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 smaller; increase greater; increase smaller; decrease

greater; increase

According to the natural-rate hypothesis, output will be at the natural rate: in the long run. if aggregate demand affects output in the long run. if inflation falls below expected inflation. if inflation exceeds expected inflation.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: greater than the expected price level. equal to the natural price level. less than the expected price level. stuck at the existing price level.

less than the expected price level.

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio. raise sometimes raise and sometimes lower not change lower

lower

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

sacrifice ratio.

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

the inflation rate rises but the unemployment rate falls.

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 ______. sticky prices; sticky wages sticky wages; sticky prices output; unemployment unemployment; output

unemployment; output