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

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Question 21

Multiple Choice

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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:

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

E) C) and D)
F) All of the above

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Question 22

Multiple Choice

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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

E) C) and D)
F) A) and C)

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Question 23

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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?

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

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.

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.

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

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

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

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.

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

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:

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

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

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?

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:

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.

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