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

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.

According to the sticky-price model:

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

According to the sticky-price model, output will be at the natural level if:

The Phillips curve depends on all of the following forces except:

Inflation inertia is represented in the aggregate supply and aggregate demand model by continuing upward shifts in the:

Both models of aggregate supply discussed in Chapter 12 imply that if the price level is lower than expected, then output natural rate of output.

According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer:

If the short-run aggregate supply curve is steep, the Phillips curve will be:

According to the imperfect-information model, in countries in which there is a great deal of variability of prices:

An economy is initially in equilibrium at the natural level. The central bank increases the money supply. Graphically illustrate and explain short-run monetary nonneutrality and long-run monetary neutrality using the AD-AS model.

Demand-pull inflation is the result of:

For each of the two models of short-run aggregate supply (sticky price and imperfect information) compare the following characteristics: a. whether the market imperfection is located in the goods market or the labor market; b. whether prices are flexible or fixed; c. whether the goods market and the labor market clear instantly.

If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:

Assume that an economy has the usual type of Phillips curve except that the natural rate of unemployment in an economy is given by an average of the unemployment rates in the last two years. Then, there is:

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

Each of the two models of short-run aggregate supply is based on some market imperfection. In the imperfect- information model, the imperfection is that:

Assume that an economy is initially at the natural rate of unemployment. a. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate change both in the short run and in the long run to an unexpected expansionary monetary policy. b. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate change both in the short run and in the long run to the announcement of a credible plan of expansionary monetary policy when people have rational expectations.

What is the sacrifice ratio? b. What factor could possibly lower the sacrifice ratio for an economy? c. What factor could possibly increase the sacrifice ratio for an economy?

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