Econ chapter 31

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be equal to potential GDP. What is your forecast for unexpected inflation?

0%

If expected inflation is 2%, and actual inflation is 2.8%, then unexpected inflation is:

0.8%

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be equal to potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power at the current level?

2%

Using the _____ and unexpected inflation, a person can forecast _____, which is summed with unexpected inflation to yield total inflation.

Phillips curve; expected inflation

An economist attempting to measure inflation expectations by sending out questionnaires only to other economists and aggregating their projections is using what method to measure inflation?

Professional inflation forecasts

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the second-highest inflation rate was:

Russia

A rise in nominal wages represents:

an increase in production costs

A financial security that has payoffs tied to the future values of inflation is known as:

an inflation swap.

A construction company raised its prices because its steel became more expensive, and the steel was more expensive because it was more expensive to get the energy to heat the steel because Saudi Arabia cut back on oil; this is an example of price change from:

cost-push inflation.

When unexpected inflation is zero, the corresponding unemployment rate is the _____ unemployment rate

equilibrium

Demand-pull inflation is inflation resulting from:

excess demand

An output gap in which output exceeds potential output will result in _____ inflation as managers adjust to _____ inflation by raising prices.

higher; demand-pull

A company raising its prices by 2% for the coming year because it has tracked inflation to be around 2% for the past 10 years shows how _____ influence future levels of inflation.

inflation expectations

In the long run, inflation is determined by:

inflation expectations

Excess demand occurs when output exceeds _____, also known as production capacity.

potential output

Insufficient demand leads to a:

surplus and falling prices

Consider the Phillips curve shown here. In region B:

the output gap is positive.

Consider the Phillips curve shown here. In region B:

there is excess demand.

Consider the Phillips curve shown here. In region A:

there is insufficient demand.

What is excess demand?

too many buyers for too few goods

Demand-pull inflation occurs when demand _____ the economy's productive capacity, and _____ changes are the issue behind cost-push inflation.

exceeds; production cost

The output gap increases from 0% to 2% on the positive side. In this case, we would expect inflation to _____ because the Phillips curve is _____ -sloping.

increase; upward

Market-based measures to forecast inflation are imperfect because _____ is/are factored into the buying and selling of inflation-based securities and _____ ignores risk.

risk; actual inflation

The figure shows inflation expectations and actual inflation for U.S. consumers over time. Which of the following statements correctly describes the relationship between these rates?

Actual inflation tends to follow inflation expectations.

Rising costs in electricity will shift the Phillips curve _____ because changing costs in electricity represent changes in _____.

upward; input prices

Forecasts expect inflation to be 2%. Actual inflation ends up being 1.75%. Holding all else equal, if there is no supply-side change in the economy, these statistics indicate inflation is ____ less than expected.

0.25%

Suppose rubber prices rise in international markets. For countries that import rubber, this scenario would lead to:

cost-push inflation.

When the quantity demanded at the prevailing price exceeds the quantity supplied, it is defined as:

excess demand.

The steeper the Phillips curve, the _____ the impact a change in the output gap will have on inflation. For example, a 2% decrease in the output gap, with the current curve, results in a 1% decrease in inflation. If the curve is steeper, then that same 2% decrease will result in a _____ decrease than the 1% change.

greater; larger

The rate at which average prices are anticipated to rise next year is defined as:

inflation expectations.

If managers have an expectation of ongoing inflation, then it is likely that:

prices will rise.

Forecasts expect inflation to be 2%. Actual inflation ends up being 1.75%. Holding all else equal, if there is no supply-side change in the economy, these statistics indicate there is:

insufficient demand.

Isla runs a construction company, and, after a few months of barely breaking even, she decided to raise the prices on all projects done by her company. Originally, Isla's firm was doing fine and was running a 50% profit margin on all projects. Isla currently has three crews doing projects and has made enough to pay them for the year. She suspects that steel and other input prices are going to increase by about 3% over the course of the year, and for any project that occurs outside of the next six months, she increases her prices by 3%. In this case, inflation pressure came from:

inflation expectations.

Inflation expectations contribute to inflationary pressures because:

managers build expectations into their pricing, resulting in higher prices regardless of inflation

A purely nominal change, like a change in the average price level, that won't have any effect on real variables in the long run is defined as:

a classical dichotomy.

When a company raises its prices because demand for its services outstrips its current ability to produce, this price rise is caused by:

excess demand.

Insufficient demand results in _____ -than-expected inflation as firms lower prices to increase customers, and excess demand results in _____ -than-expected inflation.

lower; higher

Price change is related to inflation expectations, demand-pull inflation, and _____, which occur(s) when supply chains are disrupted.

supply shocks