Deck 13: Saving, Investment, and the Financial System

Question 1

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:

A)it is costly to alter prices.
B)they do not want to annoy their frequent customers.
C)prices do not adjust when there is perfect competition.
D)some prices are set by long-term contracts between firms and customers.

Answer 1

C

Question 2

Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the:

A)target nominal-wage
B)rate. target real-wage rate.
C)proportion of firms with flexible prices.
D)proportion of firms with sticky prices.

Answer 2

C

Question 3

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

A)some firms do not adjust their prices instantly to changes in demand.
B)expectations are formed adaptively rather than rationally.
C)firms confuse changes in the overall level of prices with changes in relative prices.
D)the real wage adjusts to bring labor supply and labor demand into equilibrium.

Answer 3

A

Question 4

According to the sticky-price model:

A)all firms announce their prices in advance.
B)all firms set their prices in accord with observed prices and output.
C)some firms set their prices according to the aggregate supply equation.
D)some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

Question 5

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

A)increases production.
B)does not change production.
C)decreases production.
D)hires more workers.

Question 6

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

A)real wages and nominal wages.
B)the overall level of prices and relative prices.
C)the overall level of prices and the expected level of prices.
D)cost-push inflation and demand-pull inflation.

Question 7

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on:

A)sticky wages.
B)sticky prices.
C)temporary misperceptions about prices.
D)procyclical real wages.

Question 8

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

A)firms expect a high price level and the demand for goods is high.
B)the proportion of firms with flexible prices equals the proportion of firms with sticky prices.
C)the price level equals the expected price level.
D)expectations are formed adaptively, but not if expectations are formed rationally.

Question 9

Both models of aggregate supply discussed in Chapter 13 imply that if the price level is higher than expected, then output natural rate of output.

A)exceeds the
B)falls below the
C)equals the
D)moves to a different

Question 10

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

A)the response of output to unexpected changes in prices will be relatively large.
B)the response of output to unexpected changes in prices will be relatively small.
C)output will respond negatively to an unexpected rise in prices.
D)output will not respond to an unexpected change in prices.

Question 11

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

A)and prices are most stable.
B)and prices are most variable.
C)is most stable but prices are most variable.
D)is most variable but prices are most stable.

Question 12

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

A)positively associated with
B)negatively associated with not
C)related to
D)equal to

Question 13

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:

A)some firms do not adjust their prices instantly to changes in demand.
B)contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions.
C)firms confuse changes in the overall level of prices with changes in relative prices.
D)the real wage adjusts to bring labor supply and labor demand into equilibrium.

Question 14

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

A)increases production.
B)does not change production.
C)decreases production.
D)hires more workers.

Question 15

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

A)the proportion of firms with flexible prices.
B)the target real wage rate.
C)the target nominal wage rate.
D)the implicit agreements between workers and firms.

Question 16

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the the in output in response to an unexpected price increase.

A)greater; increase
B)smaller; increase
C)greater; decrease
D)smaller; decrease

Question 17

The higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:

A)has no effect on the slope of the short-run aggregate supply curve.
B)should make the short-run aggregate supply curve flatter.
C)makes the short-run aggregate supply curve steeper.
D)causes prices to be sticky.

Question 18

Both models of aggregate supply discussed in Chapter 13 imply that if the price level is lower than expected, then output natural rate of output.

A)exceeds the
B)falls below the
C)equals the
D)moves to a different

Question 19

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

A)output level.
B)price level.
C)expected price level.
D)level of aggregate demand.

Question 20

The basic aggregate supply equation implies that output exceeds natural output when the price level is:

A)low.
B)high.
C)less than the expected price level.
D)greater than the expected price level.

Question 21

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.

A)positive; positive
B)positive; negative
C)negative; negative
D)negative; positive

Question 22

According to the Phillips curve, other things being equal, inflation depends positively on all of the following except:

A)expected inflation.
B)the unemployment rate.
C)the natural unemployment rate.
D)a supply shock, if one occurs.

Question 23

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

A)taking all information into account using the best economic model available.
B)asking the opinions of experts.
C)basing their opinions on recently observed inflation.
D)flipping a coin.

Question 24

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the rate of unemployment.

A)structural
B)cyclical
C)short-run aggregate supply
D)nonaccelerating inflation

Question 25

The Phillips curve expresses a short-run link:

A)among nominal variables.
B)among real variables.
C)among unexpected variables.
D)between nominal and real variables.

Question 26

Inflation inertia refers to the idea that inflation:

A)is always present in economies.
B)keeps on going unless something acts to stop it.
C)cannot be reduced unless unemployment is increased.
D)can be generated by either demand-pull or cost-push forces.

Question 27

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to
In the short run, and in the long run the expected price level will , causing the level of output to return to the natural level.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 28

Which of the following will shift the aggregate supply curve up to the left?

A)an increase in the price level
B)a decrease in the level of output
C)an increase in the expected price level
D)a decrease in the price level

Question 29

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

A)neutrality; neutrality
B)nonneutrality; nonneutrality
C)neutrality; nonneutrality
D)nonneutrality; neutrality

Question 30

The relationship between short-run aggregate supply curves and Phillips curves is that there:

A)is no relationship between short-run aggregate supply curves and Phillips curves.
B)are several short-run aggregate supply curves for each Phillips curve.
C)are several Phillips curves for each short-run aggregate supply curve.
D)is exactly one Phillips curve corresponding to each short-run aggregate supply curve.

Question 31

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

A)output; prices
B)money; output
C)inflation; unemployment
D)unemployment; inflation

Question 32

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

A)aggregate demand curve.
B)short-run aggregate supply curve.
C)long-run aggregate supply curve.
D)aggregate demand and short-run aggregate supply curves.

Question 33

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

A)greater than the expected price level.
B)less than the expected price level.
C)equal to the natural price level.
D)stuck at the existing price level.

Question 34

The NAIRU is the:

A)North American institutional rate of unemployment.
B)natural aggregate investment return on utilization.
C)nonaccelerating inflation rate of unemployment.
D)normal American inelastic rate of unemployment.

Question 35

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

A)the current exchange rate.
B)expected inflation.
C)the deviation of unemployment from its natural rate.
D)supply shocks.

Question 36

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

A)demand curve will shift leftward.
B)demand curve will shift rightward.
C)supply curve will shift upward.
D)supply curve will shift downward.

Question 37

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

A)flat.
B)steep.
C)backward-bending.
D)unrelated to the slope of the short-run aggregate supply curve.

Question 38

Along any aggregate supply curve, there is only one:

A)unemployment level.
B)expected price level.
C)inflation level.
D)output level.

Question 39

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 .

A)price level; inflation rate
B)inflation rate; price level
C)unemployment rate; price level
D)price level; level of output

Question 40

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 .

A)sticky wages; sticky prices
B)sticky prices; sticky wages
C)output; unemployment
D)unemployment; output

Question 41

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 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.

Question 42

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.

Question 43

The Phillips curve in Lowland takes the form π = 0.04 - 0.5 (u - 0.05), where π is the actual inflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form π = 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 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?

Question 44

a. 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?

Question 45

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

A)both the inflation rate and the unemployment rate rise at the same time.
B)the unemployment rate rises but the inflation rate falls.
C)the inflation rate rises but the unemployment rate falls.
D)both the inflation rate and the unemployment rate fall.

Question 46

Use the aggregate demand-aggregate supply model to graphically illustrate the difference between demand-pull and cost-push inflation. Explain your graph in words.

Question 47

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.

Question 48

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.

Question 49

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.

Question 50

How would an adverse supply shock change the short-run tradeoff between inflation and unemployment? Illustrate your answer using a Phillips curve diagram.

Question 51

Cost-push inflation is the result of:
C)high aggregate demand.
B)low aggregate demand.
C)favorable supply shocks.
D)adverse supply shocks.

Question 52

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

A)both the inflation rate and the unemployment rate rise at the same time.
B)the unemployment rate rises but the inflation rate falls.
C)the inflation rate rises but the unemployment rate falls.
D)both the inflation rate and the unemployment rate fall.

Question 53

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.