Exam 12: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

According to the imperfect-information model, when the price level rises and the producer expects the price level to rise, the producer:

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Question 1

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The Phillips curve in Lowland takes the form π = .04 - .5 (u - .05), where π is the actual inflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form π = .08 - .5 (u - .05). The current unemployment rate in both countries is 9 percent (.09). a. Explain the similarities in the Phillips curves in Highland and in Lowland. b. Explain the difference in the Phillips curves in Highland and in Lowland. c. In which country will policymakers face a bigger tradeoff if they try to reduce unemployment in the short run?

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a. Both countries have a natural rate of unemployment of 5 percent, and the slope of the Phillips curve is the same in both countries. The Phillips curves in both countries indicate a short-run tradeoff between more inflation and less unemployment.
b. The expected rate of inflation is higher in Highland (8 percent) than in Lowland (4 percent). The actual rate of
inflation is also higher in Highland (4 percent) than in Lowland (2 percent).
c. The policymakers in Highland will face twice the increase in the inflation rate as the policymakers in Lowland when they both attempt to reduce unemployment. For example, to reduce the unemployment rate to 5 percent, the inflation rate will increase from 2 percent to 4 percent in Lowland, but will increase from 4 percent to 8 percent in Highland. It will require a much higher rate of inflation in Highland to achieve the same rate of unemployment as Lowland.

The estimate of the sacrifice ratio from the Volcker disinflation is approximately:

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Question 3

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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 .

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Question 4

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, , and a real variable, .

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Question 5

Inflation inertia refers to the idea that inflation:

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Question 6

The most prominent feature of the U.S. economy in the 1970s was:

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Question 7

After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:

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Question 8

The model of aggregate demand and aggregate supply is consistent with short-run monetary and long-run monetary .

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Question 9

The Phillips curve analysis described in Chapter 12 implies that there is a negative tradeoff between inflation and unemployment in:

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Question 10

Illustrate the short-run and long-run impact of an unexpected monetary contraction using both the AD-AS model and the Phillips curve. Assume the economy starts initially at full employment.

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Question 11

Assume that an economy is initially operating at the natural rate of output. Use the model of aggregate demand and aggregate supply (using the upward-sloping short-run aggregate supply curve) to illustrate graphically the short-run and long-run effects on price and output of a reduction in government spending that produces a budget surplus.

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Question 12

Assume that people form expectations rationally and that the sticky price model describes the aggregate supply curve in the economy. For each of the following scenarios explain whether or not monetary policy can have real effects on the economy: a. The central bank determines monetary policy using the same information available to all firms and at the same time firms are setting prices, so that both firms and policymakers have all of the same information. b.The central bank determines monetary policy after firms have set prices using information not available at the time prices were set.

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Question 13

In the case of cost-push inflation, other things being equal:

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Question 14

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

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Question 15

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

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Question 16

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

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Question 17

In the short-run if the price level is greater than the expected price level, then in the long run the aggregate:

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Question 18

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in , and the aggregate demand curve shifts upward because of increases in .

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Question 19

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

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Question 20

Showing 1 - 20 of 88

According to the imperfect-information model, when the price level rises and the producer expects the price level to rise, the producer:

The estimate of the sacrifice ratio from the Volcker disinflation is approximately:

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 .

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, , and a real variable, .

Inflation inertia refers to the idea that inflation:

The most prominent feature of the U.S. economy in the 1970s was:

After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:

The model of aggregate demand and aggregate supply is consistent with short-run monetary and long-run monetary .

The Phillips curve analysis described in Chapter 12 implies that there is a negative tradeoff between inflation and unemployment in:

Illustrate the short-run and long-run impact of an unexpected monetary contraction using both the AD-AS model and the Phillips curve. Assume the economy starts initially at full employment.

In the case of cost-push inflation, other things being equal:

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

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

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

In the short-run if the price level is greater than the expected price level, then in the long run the aggregate:

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in , and the aggregate demand curve shifts upward because of increases in .

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

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National Income: Where It Comes From and Where It Goes

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Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

Aggregate Demand II: Applying the Is-Lm Model

Stabilization Policy

Government Debt and Budget Deficits

Introduction to the Financial System

Asset Prices and Interest Rates

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