Deck 15: The Microeconomic Foundations of Price Rigidity

Question 1

Suppose that an economy were initially producing at potential and perfectly balanced inflation were then to proceed for a year without effecting relative prices. In that case, the information-based theory predicts

A) a positive correlation between the actual/potential GDP gap and prices.
B) a negative correlation between the actual/potential GDP gap and prices.
C) absolutely no gap between actual and potential GDP by year's end.
D) nothing at all because its assumption of altered relative prices is moot.
E) that monetary policy would be much stronger than fiscal policy in moving actual GDP toward potential GDP in the short run.

Answer 1

absolutely no gap between actual and potential GDP by year's end.

Question 2

According to standard micro theory, a firm produces up to the point where

A) price equals the markup over marginal cost.
B) marginal revenue equals marginal cost.
C) price is less than marginal cost by an amount equal to the return to capital.
D) price exceeds marginal cost by an amount equal to the return to capital.
E) none of the above.

Answer 2

marginal revenue equals marginal cost.

Question 3

Let aggregate demand rise in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. In that case, you expect to see

A) a large change in GDP coupled with a small increase in prices.
B) a large change in GDP coupled with a small reduction in prices.
C) a small change in GDP coupled with a large increase in prices.
D) a small change in GDP coupled with a small reduction in prices.
E) a small change in GDP coupled with a large reduction in prices.

Answer 3

a small change in GDP coupled with a large increase in prices.

Question 4

^{Let the supply schedule for a firm be Y}i ^{= 15P}i ^{- Pe) + 7, where the best} guess of the expected price P^e is related to the forecast price P^{^} according to ^{Pe = P^ + 0.7P}i ^{- P^). If there are 200 firms and the forecast price matches the}
Actual price, then output must equal

A) 7.
B) 15.
C) 700.
D) 1,400.
E) 2,000.

Question 5

Let aggregate demand fall in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. You, in that case, expect

A) a large change in GDP coupled with a small increase in prices.
B) a large change in GDP coupled with a small reduction in prices.
C) a small change in GDP coupled with a large increase in prices.
D) a small change in GDP coupled with a small reduction in prices.
E) a small change in GDP coupled with a large reduction in prices.

Question 6

Let the Fed announce a 3.3 percent increase in the money supply after a period of economic stability at Y* = $5,000 and some price index
P = 100. Which of the following is a possible result, assuming a usual, Lucas-type supply curve?

A) GDP climbing to $5,167 with P = 100
B) GDP staying at $5,000 with P = 100
C) GDP staying at $5,000 with P climbing to 103.3
D) GDP climbing to $5,167 with P climbing as well to 103.3
E) none of the above

Question 7

The tendency for the principle of money neutrality not to hold in the short

A) David Hume.
B) John Maynard Keynes.
C) Milton Friedman.
D) Robert Lucas.
E) none, all of the above were interested in this issue.

Question 8

^{Let price expectations be represented by Pe = P^ + bP}i ^{-P^), with Pe}
Representing firms' expected general price indicators, representing some
General forecast of overall prices, and P_{i r}^{epresenting firms'own prices. If} the firms' own prices were thought to have no effect on general prices, then

A) b < 0.
B) b = 0.
C) b > 0.5.
D) b = 1.
E) b > 1.

Question 9

Let the supply schedule for a single firm be Yi = 15Pi - Pe) + 7 and the best
^ guess for the expected price level Pe be related to the forecasted price P according to Pe = P^ + 0.7Pi - P^). If 200 firms are in the industry, which of
the following is the Lucas supply schedule?

A) Yi = 4.5Pi - P ) + 7
B) Yi= 4.5Pi - P^) + 700
C) Y = 900P - P^) + 700
D) Yi = 900P - P^) + 1,400
E) Yi= 900P - P^) + 1,400

Question 10

Which of the following is an assumption of the information-based model of supply developed by Lucas?

A) Prices and wages are assumed to be flexible.
B) People are not fully informed about what is going on in the economy.
C) A positive correlation between supply price and quantity is assumed for firms' individual supply curves.
D) All of the above are accurate.
E) None of the above is accurate.

Question 11

Two classes of explanations, imperfect information and sticky prices or nominal wage contracts, have been advanced to explain the phenomenon we call price rigidity. Which of the following statements regarding price rigidity is not correct?

A) Both are necessary for a complete understanding of price rigidity.
B) Price rigidity determines, to a large extent, the efficacy of monetary policy.
C) Microeconomic underpinnings such as these help clarify the effects of monetary policy.
D) Macroeconomists disagree about the relevance of price rigidity to effective monetary policy.
E) All of the above statements are correct.

Question 12

Given an increase in the price of the product of some arbitrarily selected firm, you would expect to see that firm

A) increase output regardless of other economic indicators.
B) increase output in most instances depending on economic circumstances that cannot be defined.
C) increase output if its own price increases faster than the general price level including imports.
D) reduce output regardless of other economic indicators.
E) reduce output if its own price increases faster than the general price level excluding imports.

Question 13

If the price of a firm's product rose faster than the overall pace of inflation, then you would expect to see that firm's output

A) increase.
B) decrease.
C) remain unchanged.
D) move steadily in a direction dictated by circumstances not described in this question.
E) move erratically around a predetermined target whose specification would be unaffected by general inflation.

Question 14

Let all prices increase at an annual rate of 10 percent. Suppose, however, that it takes each firm six months to find out that any price but its own has changed. Lucas would expect firms in this environment, in the short run at least, to produce

A) more than they would if they could observe other price adjustments more promptly.
B) less than they would if they could observe other price adjustments more promptly.
C) just as much as they would if they could observe other price adjustments more promptly.
D) just as much as they would if they could observe other price adjustments more promptly only if monetary policy were unaffected.
E) none of the above.

Question 15

^{Given the Lucas formulation of supply Y}i ^{= h[P}i ^{- P] + Y}i^{, where Y}i

A) positive because prices are sticky going down.
B) negative because the lack of pricing information is positively correlated with output.
C) positive because, when the relative price of their product rises, firms increase their output.
D) negative because firms' implicit demand curves are assumed to be negatively sloped.
E) none of the above.

Question 16

The neoclassical models of macroeconomics

A) replace the flexible price assumption with an assumption of automatic price adjustments.
B) keep the flexible price assumption but incorporate informational difficulties into the representation of their adjustment.
C) keep the flexible price assumption but incorporate a measure of price inertia exerted from the foreign sector.
D) keep the flexible price assumption but modify the model of the money market to incorporate disequilibrium dynamics.
E) none of the above.

Question 17

Let a firm, under normal circumstances, produce 100,000 units of some good Y. If the price of Y were to increase at a rate that matched the overall inflation of 10 percent, then the Lucas model would predict that the firm would produce

A) less than 100,000 units.
B) more than 100,000 units.
C) exactly 100,000 units.
D) more or less than 100,000 units depending on the real rate of interest.
E) more or less than 100,000 units depending on unspecified economic conditions.

Question 18

^{Let price expectations be represented by Pe = P^ + bP}i ^{-P^), with Pe} representing firms' expected general price indicators, representing some ^{general forecast of future prices, and P}i ^{representing the firms' own prices. If b}1 ^{were the b coefficient for some large firm in a primary industry like steel and b}2 ^{were the b coefficient for a small firm in an unimportant, endproduct} industry, then you would expect that

A) ^b1 ^{> b}2^.
B) ^b1 ^{< b}2^.
C) ^b1 ^{= b}2^.
D) any of the above could hold depending on the foreign trade significance of the two industries.
E) any of the above could hold depending on unspecified economic circumstance.

Question 19

Under the assumptions of a Lucas supply curve,

A) firms do not respond significantly to changes in their own relative prices.
B) firms generally respond significantly to changes in their own relative prices.
C) firms generally respond significantly to changes in aggregate prices.
D) firms generally ignore changes in aggregate prices.
E) none of the above.

Question 20

Let the usual price expectations relationship hold so that it can be ^{represented mathematically by Pe = P^ + bP}i ^{-P^). As the coefficient b gets}
Larger, the Lucas supply curve

A) must get steeper.
B) must get flatter.
C) may get steeper or flatter depending on price variability.
D) must shift out from the vertical axis.
E) must shift in toward the vertical axis.

Question 21

The logic of predetermined or rigid wages dictates that wages must be set in

A) pounds of sugar.
B) domestic nominal currency units.
C) foreign nominal currency units.
D) terms of any real commodity.
E) none of the above.

Question 22

If nominal wages are sticky, then nominal price stickiness

A) is likely to result only if there are large costs to changing prices.
B) is likely to result even if firms set prices at the exact optimum.
C) is likely to occur only in those cases where firms have limited incentives to set the optimal price.
D) is likely to occur even in the case of precious metals.
E) prevails in all products.

Question 23

Empirical work designed to investigate how well imperfect-information theory explains real world divergence between actual and potential GDP has shown

A) only that monetary changes precede employment and output fluctuations.
B) the importance of other types of shocks in macroeconomic fluctuations.
C) a strong correlation between price surprises and the GDP gap that provides impressive support for the theory.
D) a and b only.
E) none of the above because the data are so poor.

Question 24

As general price variability climbs, the Lucas supply curve

A) must grow steeper.
B) must grow flatter.
C) must shift out from the vertical axis.
D) must shift in toward the vertical axis.
E) is left unaffected.

Question 25

Given the usual Lucas supply curve and aggregate demand positively correlated with the real money supply, a sudden reduction in the money supply should cause

A) output to fall while prices remain the same.
B) output to fall while prices increase.
C) output to rise while prices increase.
D) output to fall while prices fall.
E) output to remain the same while prices decline.

Question 26

As the demand schedule for a given product shifts up and to the right, the short-run response to be expected is

A) an increase in price and a reduction in quantity sold.
B) an increase in both the price and the quantity sold.
C) a reduction in both the price and the quantity sold.
D) a reduction in price and an increase in the quantity sold.
E) any of the above depending on circumstance.

Question 27

In an economy described by a Lucas supply curve and an aggregate demand curve that responds positively to real money balances M/P), an anticipated increase in the money supply results in

A) an increase in output and the price level.
B) an increase in output but no increase in the price level.
C) no increase in output or the price level.
D) no increase in output and the price level.
E) a decrease in output and an increase in the price level.

Question 28

Suppose, under the imperfect-information model, that a stimulative monetary policy is enacted in an attempt to increase real GDP. Its effectiveness is larger

A) the more firms expect the stimulus to increase relative prices.
B) the more firms expect the stimulus to increase output.
C) the smaller the resulting variation in price expectations.
D) a and c only.
E) none of the above.

Question 29

The main reason price rigidity in the United States takes the form of nominal rigidity is that

A) the prices of raw commodities are much more volatile in real terms in the United States than elsewhere.
B) the dollar has varied widely in value relative to alternatives.
C) the dollar has maintained a relatively stable value compared with other commodities that might be used to quote prices.
D) the prices of raw commodities are much less volatile in real terms in the United States than elsewhere.
E) none of the above.

Question 30

Most contracts settled by collective bargaining in the United States are for

A) one year.
B) two years.
C) three years.
D) four years.
E) over four years.

Question 31

^{Let aggregate demand be summarized by Y = k}0 ^{+ k}1^{M - P) and aggregate}
Supply by P = P^{^}
^
+ cY - Y*). All notation is standard but for , which here
Represents forecasted general prices. A change in the responsiveness of firms' prices to expectations is captured by a change in

A) only c.
B) ^{only k}1^.
C) ^{only k}0^.
D) ^{both k}0 ^{and k}1^.
E) none of the above.

Question 32

The policy ineffectiveness theorem states that, in an economy where expec- tations are rational, an anticipated increase in the money supply results in

A) an increase in output and the price level.
B) an increase in output but no increase in the price level.
C) no increase in output or the price level.
D) no increase in output and the price level.
E) a decrease in output and an increase in the price level.

Question 33

^{Let aggregate demand be summarized by Y = k}0 ^{+ k}1^{M - P) and aggregate} supply by P = P^{^} + cY - Y*). A change in government spending is captured

A) only c.
B) ^{only k}1^.
C) ^{only k}0^.
D) ^{both k}0 ^{and k}1^.
E) none of the above.

Question 34

Price stickiness

A) is most acute in instances where hardware changes are necessary for price adjustment.
B) is typically not a factor in agricultural and standardized industrial commodities.
C) often arises due to a phenomenon economists refer to as menu costs.
D) is unlikely to be important in prices negotiated on the spot.
E) all of the above.

Question 35

As general price variability declines, the Lucas supply curve

A) must get steeper.
B) must get flatter.
C) must shift out from the vertical axis.
D) must shift in toward the vertical axis.
E) is left unaffected.

Question 36

In countries where the domestic currency unit is not necessarily used to quote prices, it is likely that

A) the currency unit has appreciated in value against most commodities.
B) the monetary authority has run tight money policies in the past.
C) the currency unit has undergone large changes in value relative to commodities or other countries' currency units.
D) fiscal policy has been very contractionary.
E) c and d.

Question 37

One result of the Lucas rational-expectations model is that an anticipated increase in the money supply

A) becomes more effective in manipulating GDP when firms' pricing decisions are more responsive to forecasts of general price levels.
B) is completely ineffective in manipulating GDP if firms' pricing decisions are not responsive to forecasts of general price levels.
C) is completely ineffective in manipulating GDP because monetary policy does not affect aggregate demand.
D) b and c only.
E) none of the above.

Question 38

Which of the following would be strong evidence that imperfect information explained departures of actual demand from potential?

A) noting that the theory of imperfect information provides a story of how the departure might come about without relying on sticky prices
B) observing that positive price shocks in the real world seem to happen just prior to an economic boom
C) observing that positive price shocks in the real world seem to happen just prior to an economic recession
D) observing that negative price shocks in the real world seem to happen just before an economic boom
E) none of the above

Question 39

Any implication of the imperfect-information model is that any stimulus in aggregate demand is channeled more strongly into price acceleration

A) the more firms expect that stimulus to be channeled in prices.
B) the more firms expect that stimulus to be felt in output.
C) the smaller the uncertainty surrounding the price acceleration.
D) the smaller the uncertainty surrounding what output stimulus might be felt.
E) none of the above.

Question 40

Intuitively, the Lucas supply curve grows more inelastic as general prices become more variable because

A) firms get less information from forecasts of general prices.
B) firms get exaggerated bad news about the future trend of general prices.
C) employment adjustments become more difficult during periods of uncertain inflation.
D) a and c only.
E) none of the above.

Question 41

Reasons advanced for the rigidity of prices to changes in demand but not changes in costs include

A) limitations on the information firms can collect and process.
B) long-term purchasing contracts that fix large components of the cost equation for long periods of time.
C) the managerial simplicity of stable prices.
D) the workings, legal and otherwise, of imperfectly competitive markets.
E) all of the above.

Question 42

Staggered wage settlements, in comparison with simultaneous settlements,

A) provide more information about relative wages and prices automatically during any negotiation process.
B) provide some added and sometimes valuable stability in wages and prices.
C) seem to be a natural part of a decentralized labor market.
D) all of the above.
E) none of the above.

Question 43

Which of the following has been advanced as a rationale behind the construction of an expectations-augmented Phillips curve?

A) Imperfect information
B) Wage lags caused by long-term contracts
C) Wage sensitivity to expected inflation
D) All of the above
E) None of the above

Question 44

Let all workers sign three-year contracts with guaranteed 10 percent wage increases built in for each year. Let GDP match potential GDP to begin with and let potential GDP grow at 3 percent per year. To maintain GDP at potential, the money supply would have to grow at an annual rate of

A) 3 percent because price inflation under the markup model is 3 percent.
B) 7 percent because price inflation under the markup model is 7 percent.
C) 10 percent because price inflation under the markup model is 10 percent.
D) 13 percent because price inflation under the markup model is 10 percent.
E) 13 percent because price inflation under the markup is 13 percent.

Question 45

Simultaneous wage agreements could

A) be possible in the United States but only if the government were to intervene directly in the labor market.
B) be the natural result of the workings of a competitive labor market if only the unions let it happen.
C) be observed in the United States if the United States only mimics the economic systems of most of the developed world.
D) certainly achieve macroeconomic advantage without microeconomic cost if it were arranged.
E) none of the above.

Question 46

Output will be maintained at 1 percent above its potential for the next five years. Which of the following is a possible scenario of successive inflation rates over that period assuming no outside price shocks and an expectations- augmented Phillips curve?

A) 1 percent, 2 percent, 3 percent, 5 percent, and 8 percent
B) 10 percent, 11 percent, 13 percent, 12 percent, and 10 percent
C) 15 percent for each of the next five years
D) 8 percent, 7 percent, 5 percent, 3 percent, and 2 percent
E) 9 percent, 7 percent, 4 percent, 10 percent, and 15 percent

Question 47

Let all workers sign three-year contracts with 10 percent wage increases guaranteed for each year. Let actual GDP match its potential to begin with and assume that potential GDP grows 3 percent per year. If the money supply were to grow at 5 percent per year, given markup pricing, you should expect to see

A) continued 10 percent inflation per year with no recession.
B) continued 10 percent inflation per year with some recession.
C) a reduction in inflation to 2 percent per year with no recession.
D) a reduction in inflation to 2 percent per year with some recession.
E) cannot tell from the information provided.

Question 48

Wage determination in the nonunion sector is

A) not influenced by the same factors that affect collective bargaining in the union sector.
B) more synchronized than in the union sector.
C) less sensitive to the rate of unemployment than in the union sector.
D) less sensitive to the rate of inflation than it is in the union sector.
E) none of the above.

Question 49

Factors that influence the outcomes of collective-bargaining negotiations include

A) the state of the labor market.
B) the wages paid in comparable industries.
C) the expected inflation rate.
D) the strength of foreign competition.
E) all of the above can influence collective-bargaining negotiations to some degree.

Question 50

With markup pricing and multiyear contracts staggered across three-year intervals,

A) monetary policy cannot influence real GDP even if expectations are rational.
B) monetary policy cannot influence real GDP even if wages are otherwise flexible.
C) monetary policy can influence real GDP even if expectations are rational.
D) monetary policy cannot influence real unemployment even if wages are otherwise flexible.
E) none of the above.

Question 51

The "natural rate" property states by definition that

A) the unemployment rate must exceed the natural rate if actual GDP falls short of its potential.
B) the unemployment rate must fall short of the natural rate if actual GDP exceeds its potential.
C) the unemployment rate is independent of outside price shocks because it is set by the natural operation of the certainty equivalent economy.
D) any attempt to keep actual GDP above its potential produces accelerating inflation.
E) unemployment can be maintained at the natural rate for any rate of inflation.

Question 52

Given an expectations-augmented Phillips curve of the usual form and no outside price shocks, inflation matching expected inflation over the long term can be consistent with

A) actual GDP matching its potential over the long term.
B) actual GDP falling short of its potential over the long term.
C) actual GDP exceeding its potential over the long term.
D) a spiraling divergence of actual GDP away from its potential over the long term.
E) any of the above depending on circumstance.

Question 53

In the United States, typically,

A) three-year contracts in industry overlap so that few workers are engaged in collective bargaining at the same time.
B) long, five-year contracts are synchronized so that large numbers of workers are engaged in collective bargaining at one time.
C) one-year contracts are synchronized so that most workers are engaged in collective bargaining at the same time.
D) three-year contracts are synchronized so that many workers are engaged in collective bargaining at the same time.
E) none of the above.

Question 54

Which of the following has not been advanced as a reason explaining why contracts are set for such long periods of time with so few contingency clauses?

A) Contract negotiation with its incumbent threat of strike is expensive even before factoring in the cost of preparing for collective bargaining.
B) Contingency clauses are difficult to write in a way that protects both employers and employees in all contingencies.
C) Contingency clauses are complicated and spread risks in ways that are hard to judge.
D) All of the above.
E) None of the above.

Question 55

As demand shifts up, the short-run scenario from microeconomic theory includes

A) prices rising faster than costs.
B) firms earning excess profits.
C) output climbing along the marginal cost schedules of existing firms.
D) an eventual increase in the number of firms operating in the given market and an associated shift in the market supply curve.
E) all of the above.

Question 56

Suppose two groups of workers are bargaining for two-year contracts, one on even years and one on odd years. Both set wages equal to a constant times a price level in the negotiating year and increase it by last year's inflation in the second year of the contract. The Fed initiates four years of disinflationary monetary policy. You should expect to see

A) no recession.
B) some reduction in actual GDP relative to its potential.
C) some increase in unemployment above the natural rate.
D) some pressure to adjust the inflation index of the contract in exchange for increased job security.
E) b, c, and d.

Question 57

In justifying the construction of an expectations-augmented Phillips curve, outside price shocks must be viewed as

A) sudden wage adjustments.
B) sudden employment adjustments.
C) factors that affect inflation through channels other than market conditions or expectations.
D) sudden shortages in new entrants into the labor force required to support growth.
E) all of the above.

Question 58

Suppose 15 percent inflation becomes the annual norm. The net effect of this inflation, given rational expectations and staggered, long-term contracts, is

A) a reduction in unemployment below the natural rate as stability in relative prices became part of the inflationary norm.
B) an increase in unemployment above the natural rate as double-digit inflation caused employers to become increasingly nervous about future economic vitality.
C) a convergence of unemployment to the natural rate.
D) any of the above depending on circumstance.
E) cannot tell from the information provided.

Question 59

The "acceleration" property states by definition that

A) the unemployment rate must exceed the natural rate if actual GDP falls short of its potential.
B) the unemployment rate must fall short of the natural rate if actual GDP exceeds its potential.
C) the unemployment rate is independent of any accelerated inflation caused by outside price shocks.
D) any attempt to keep actual GDP above its potential must produce accelerating rates of inflation.
E) unemployment can be maintained at the natural rate even given accelerating inflation.

Question 60

Reasons for wages being set for long periods of time include which of the following?

A) Collective bargaining is costly.
B) Strikes or the threat of strikes are costly.
C) Careful review of workers' performance is costly.
D) The uncertainty of contingency clauses is costly.
E) All of the above.

Question 61

Changes in economic circumstance

A) usually require the researcher to adjust the entire structure of an expectations-augmented Phillips curve.
B) usually can be accommodated in the expectations-augmented Phillips curve by adjusting the parameter values that reflect the sensitivity of inflation to market conditions.
C) usually cannot be accommodated by an expectations-augmented Phillips curve unless they involve a fundamental change in the structure of the labor market.
D) a and c.
E) none of the above.

Question 62

Indexing wages to inflation

A) increases the sensitivity of inflation to changes in the labor market.
B) reduces the sensitivity of inflation to changes in the labor market.
C) increases the sensitivity of inflation to outside price shocks.
D) a and c.
E) none of the above.

Question 63

The shorter is the business cycle,

A) the more sensitive inflation becomes to changes in business conditions.
B) the less sensitive inflation becomes to changes in business conditions.
C) the more sensitive inflation becomes to changes in the wage rate.
D) a and c.
E) none of the above.

Question 64

In the short run, a model of how expectations are formed

A) must be the single model that supports the natural-rate property in the long run.
B) must be singularly identified and employed to ex p l o re the effe c t iveness of m a ny diffe rent policies if comparat ive policy studies are to be meaningful.
C) must be altered whenever macroeconomic policy changes.
D) makes little difference when it comes to reaching qualitative results already supported by empirical research.
E) none of the above.

Question 65

Inflation associated with potential GDP persists at higher levels for longer periods of time

A) the more heavily people weight recent inflation in forming their inflationary expectations.
B) the less sensitive inflation is to the gap between actual and potential GDP.
C) the more sensitive inflation is to the gap between actual and potential GDP.
D) a and b.
E) all of the above.

Question 66

Given an expectations-augmented Phillips curve and a policy designed to maintain GDP above its potential indefinitely, what sort of expectations model is required to keep inflation from accelerating year after year?

A) The persistent expectation that inflation will continue to be zero
B) Expectations based on the inflationary experience of the past 20 years
C) Expectations based on the inflationary experience of only the very recent past
D) Expectations based on completely accurate information
E) No expectations model produces stable prices with actual GDP consistently higher than its potential.

Question 67

Factors influencing inflationary expectations include

A) forward-looking forecasts built into wage negotiations.
B) inflationary momentum owing to staggered contract settlements.
C) inflationary momentum owing to backward-looking wage behavior.
D) all of the above.
E) none of the above.

Question 68

Indexing makes nominal wages

A) less responsive to market conditions.
B) more responsive to market conditions.
C) less sensitive to price shocks.
D) less likely to be set in long-term contracts.
E) none of the above.

Question 69

Research into producing a universally applicable model of expected inflation

A) is the next essential step in building our understanding of macroeconomics.
B) has been proceeding well over the recent past and should soon conclude successfully with a theory that covers almost every policy environment.
C) is a waste of time because no such globally applicable model exists; expectations and the basis of their formation change from one economic environment to another.
D) could be expected to apply only to particular nations with different parameters being used to identify different economies in different stages of development.
E) none of the above.

Question 70

The result that no long-run trade-off between output and inflation exists

A) depends critically on how inflationary expectations are formed as they enter the Phillips curve.
B) can be supported by a Phillips curve model given almost any view of how inflationary expectations are formed.
C) is nonsense because it is most certainly not true in the short run.
D) cannot be true if a short-run trade-off between unemployment and inflation exists.
E) none of the above.

Question 71

Empirical evidence from the United States suggests that business cycles have

A) been growing shorter since the Second World War, thereby increasing the sensitivity of inflation to business conditions.
B) been growing shorter since the Second World War, thereby decreasing the sensitivity of inflation to business conditions.
C) been growing longer since the Second World War, thereby increasing the sensitivity of inflation to business conditions.
D) been growing longer since the Second World War, thereby decreasing the sensitivity of inflation to business conditions.
E) shown no pattern since the Second World War and therefore had no systematic effect on the sensitivity of inflation to business conditions.

Question 72

Given an expectations-augmented Phillips curve and a policy designed to maintain actual GDP higher than its potential indefinitely,

A) any set of inflationary expectations other than zero produces constant, positive inflation and unemployment below the natural rate.
B) any set of inflationary expectations other than zero produces accelerating prices with unemployment above the natural rate.
C) any set of inflationary expectations produces accelerating prices with unemployment below the natural rate.
D) any set of inflationary expectations other than zero produces decelerating inflation with unemployment below the natural rate.
E) none of the above.

Question 73

Let wages be indexed to inflation by a factor of 50 percent. A 1 percent price shock, in that case, ultimately produces an increase in prices of

A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 1.5 percent.
E) none of the above.