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

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, a cost-push inflation would be represented by a shift from:

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

Is the sacrifice ratio a cost to reduce inflation? Explain.

If the short-run aggregate supply curve is assumed to be horizontal, international capital flows are infinitely elastic, and the nominal exchange rate is fixed, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, if there is an unexpected monetary contraction that shifts aggregate demand from AD₁ to AD₃, then the long-run neutrality of money is represented by the movement from:

The Phillips curve in Lowland takes the form of $\pi$ = 0.04 - 0.5 (u - 0.05), where $\pi$ is the actual inflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form of $\pi$ = 0.08 - 0.5 (u - 0.05). The current unemployment rate in both countries is 9 percent (0.09). a. Explain the similarities in the Phillips curves in Highland and in Lowl and. b. Explain the difference in the Phillips curves in Highland and in Low and. c. In which country will policymakers face a bigger tradeoff if they try to reduce unemployment in the short run?

For each of the two models of short-run aggregate supply (sticky price and imperfect information) compare the following characteristics: a. the nature of the market imperfection that generates the short-iun movements in output associated with unexpected movements in the price level; b. whether prices are flexible or fixed;

Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.

Each of the following conditions will tend to reduce the sacrifice ratio except when:

In the sticky-price model, the relationship between output and the price level depends on:

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.

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

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

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

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

According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level.

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

The assumption of rational expectations for inflation means that people will form their expectations of inflation by:

Are relative prices or nominal prices the right indicators in the context of supply changes?

Use the following to answer questions : Short-run Phillips Curve -(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face: