Exam 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income, then the big, comprehensive model in the appendix to Chapter 14 corresponds to which of the following special cases?

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

The firms and workers in Alpha form expectations adaptively. The firms and workers in Omega form expectations rationally. Their otherwise identical economies are initially in equilibrium at the natural level of output with 10 percent inflation. The central banks of both Alpha and Omega make credible commitments to reduce the growth rates of money until they achieve 2 percent inflation. Compare and contrast the adjustment process to the new equilibrium at the lower rate of inflation in both countries.

What is the natural rate hypothesis? Explain the term NAIRU.

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.

The endogenous variables of "A Big, Comprehensive Model" in the appendix to Chapter 14 include the level of output, the natural rate of output, the price level, and:

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 hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:

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

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

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:

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.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output _____ natural rate of output.

Does the Phillips curve relationship between unemployment and inflation hold in the long run? Explain.

The Phillips curve shows a _____ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a _____ relationship between the price level and output.

Exhibit: AD-AS Shifts Starting from long-run equilibrium at A with output equal to and the price level equal to P₁, a demand-pull inflation would be represented by a shift from:

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

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:

If price expectations are assumed to be correct, money demand is proportional to income, and net capital flow is infinitely elastic, then the big, comprehensive model in the appendix to Chapter 14 corresponds to which of the following special cases?

All of the following are requirements for reducing inflation without causing a recession except: