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

Question 1

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.

Answer 1

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

Question 2

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.

Answer 2

the proportion of firms with flexible prices.

Question 3

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

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

Answer 3

does not change production.

Question 4

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 5

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 6

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 7

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.

Question 8

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 9

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 10

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.

Question 11

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 12

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 13

Using the sticky-price model, 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 14

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

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

Question 15

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.

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

Question 16

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 17

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 18

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 19

According to the imperfect-information model, when the price level is greater than the expected price level, output will _____ the natural level of output

A) be greater than
B) be less than
C) be equal to
D) shift the

Question 20

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
C) not related to
D) equal to

Question 21

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 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:

A) A to B
B) A to G
C) A to C
D) A to D

Question 22

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 23

Along any aggregate supply curve, there is only one:

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

Question 24

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 25

Both models of aggregate supply discussed in Chapter 14 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 26

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 27

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 28

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 and the price level equal to P₁, if there is an unexpected monetary contraction that shifts aggregate demand from AD₁ to AD₃, then the short-run nonneutrality of money is represented by the movement from:

A) A to B
B) A to G
C) A to C
D) A to D

Question 29

According to the Phillips curve, other things being equal, inflation depends positively on:

A) expected inflation.
B) the unemployment rate.
C) the rate of technological change.
D) the quantities of capital and labor.

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

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 32

All of the following are ways that the modern Phillips curve differs from the relationship observed by A. W. Phillips in 1958 except that the modern Phillips curve:

A) substitutes the output gap for unemployment.
B) includes supply shocks.
C) includes expected inflation.
D) substitutes price inflation for wage inflation.

Question 33

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 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

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 36

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 37

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 38

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 39

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 40

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 41

If the equation for a country's Phillips curve is $\pi$ = 0.02 - 0.8(u - 0.05), where $\pi$ is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

A) above 2 percent (0.02)
B) below 2 percent (0.02)
C) 2 percent (0.02)
D) -2 percent (-0.02)

Question 42

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.

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

Question 43

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 44

Cost-push inflation is the result of:

A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.

Question 45

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 46

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 47

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

A) exceeds the inflation rate.
B) equals the inflation rate.
C) is below the inflation rate.
D) equals the inflation rate of the previous year.

Question 48

Demand-pull inflation is the result of:

A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.

Question 49

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 50

The short-run Phillips curve:

A) shifts upward if expected inflation increases.
B) shifts upward if expected inflation decreases.
C) shifts downward if expected inflation increases.
D) is vertical.

Question 51

In the 1960s, in the United States:

A) both the inflation rate and the unemployment rate rose at the same time.
B) the unemployment rate rose but the inflation rate fell.
C) the inflation rate rose but the unemployment rate fell.
D) both the inflation rate and the unemployment rate fell.

Question 52

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

A) cost-push deflation.
B) cost-push inflation.
C) demand deflation.
D) demand inflation.

Question 53

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 and the price level equal to P₁, a demand-pull inflation would be represented by a shift from:

A) AD₁ to AD₂
B) AD₁ to AD₃
C) AS₁ to AS₂
D) AS₁ to AS₃

Question 54

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:

A) the same tradeoff between inflation and unemployment.
B) a lower rate of inflation for any level of unemployment.
C) a higher rate of inflation for any level of unemployment.
D) higher than expected inflation rates and lower unemployment rates.

Question 55

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

A) both the short run and long run.
B) in the short run only.
C) in the long run only.
D) in neither the short run nor the long run.

Question 56

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 ______.

A) the expected price level; the money supply
B) the money supply; the expected price level
C) output; the price level
D) the price level; output

Question 57

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 and the price level equal to P₁, a cost-push inflation would be represented by a shift from:

A) AD₁ to AD₂
B) AD₁ to AD₃
C) AS₁ to AS₂
D) AS₁ to AS₃

Question 58

Inflation inertia is represented in the aggregate supply-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 59

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 60

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

A) cost-push inflation.
B) cost-push deflation.
C) demand-pull inflation.
D) demand-pull deflation.

Question 61

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

A) the expected rate of inflation is unchanged at every level of unemployment.
B) there is a lower-expected rate of inflation at every level of unemployment.
C) there is a higher-expected rate of inflation for every level of unemployment.
D) the natural rate of unemployment falls

Question 62

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

A) changing an unemployed individual's attitude toward work.
B) reducing an unemployed worker's job skills.
C) permanently reducing the money supply.
D) altering the wage-setting process.

Question 63

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

A) the history of economic thought is important to macroeconomics.
B) workers get hysterical during long depressions.
C) hysteresis lowers the sacrifice ratio.
D) the natural rate of unemployment may increase if unemployment is high for a long period of time.

Question 64

The endogenous variables of the mother of all models in the Appendix to Chapter 14 include the level of output, the natural rate of output, the price level, and:

A) the real and nominal interest rates.
B) the money supply.
C) the world price level.
D) government purchases.

Question 65

According to the natural-rate hypothesis, output will be at the natural rate:

A) if inflation exceeds expected inflation.
B) if inflation falls below expected inflation.
C) in the long run.
D) if aggregate demand affects output in the long run.

Question 66

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:

A) Okun's law.
B) the cold-turkey approach.
C) the natural-rate hypothesis.
D) hysteresis.

Question 67

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

A) workers and firms must form expectations rationally.
B) the plan must be announced before expectations are formed.
C) the plan must be believed by workers and firms.
D) the government's budget must be balanced.

Question 68

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

A) optimally using all available information, including information about current policies, to forecast the future.
B) asking the opinions of the best experts.
C) subscribing to the forecasting service that uses the best econometric model.
D) basing their opinions on recently observed inflation.

Question 69

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

A) raise
B) lower
C) not change
D) sometimes raise and sometimes lower

Question 70

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:

A) both the short run and the long run.
B) only in the short run.
C) only in the long run.
D) in neither the short run nor the long run.

Question 71

The sacrifice ratio measures the:

A) number of percentage points of the money supply that must be reduced to reduce inflation by 1 percentage point.
B) extra taxes that must be paid to balance the budget.
C) number of months of real gross domestic product (GDP) that must be foregone to reduce the inflation rate by 1 percentage point.
D) percentage of a year's real gross domestic product (GDP) that must be foregone to reduce inflation by 1 percentage point.

Question 72

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

A) increase.
B) decrease.
C) remain unchanged.
D) be zero.

Question 73

An economy must sacrifice 12 percent of GDP to reduce inflation. Which of the following plans represents the "cold turkey" solution to inflation?

A) Reduce output by 1 percent for 12 years.
B) Reduce output by 2 percent for 6 years.
C) Reduce output by 4 percent for 3 years.
D) Reduce output by 12 percent for 1 year.

Question 74

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

A) workers and firms set wages and prices based on rational expectations.
B) policymakers make credible commitments to policy changes.
C) announcements of policy changes are made before workers and firms have formed expectations.
D) the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.

Question 75

Each of the following phenomena hinders the precise estimation of the natural rate of unemployment except:

A) supply shocks such as oil price increases.
B) demographic changes such as the aging baby boomers.
C) policy changes such as minimum wage increases.
D) introduction of new products such as DVD players.

Question 76

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the:

A) NAIRU.
B) short-run Phillips curve.
C) sacrifice ratio.
D) Okun's law.

Question 77

According to the natural-rate hypothesis, the levels of output and unemployment depend on:

A) aggregate demand in the short run, but not in the long run.
B) aggregate demand in the long run, but not in the short run.
C) the natural rate of unemployment in the short run, but the natural rate of inflation in the long run.
D) the natural rate of inflation in the short run, but the natural rate of unemployment in the long run.

Question 78

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.

A) 4
B) 5
C) 20
D) 40

Question 79

All of the following are exogenous variables in the mother of all models in the Appendix to Chapter 14 except the:

A) world interest rate.
B) labor force.
C) world real interest rate.
D) price level.

Question 80

Economists are able to estimate the natural rate of unemployment in the United States:

A) very precisely.
B) in a 95 percent confidence interval of 2 to 3 percentage points.
C) in a 95 percent confidence interval of 10 to 20 percentage points.
D) only in years when there are no supply shocks.