Question 1

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.

Accepted Answer

B

Question 2

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

Accepted Answer

According to the sticky-price model, prices are slow to adjust to changes in demand or supply, leading to temporary deviations of output from the natural level. These deviations are positively associated with deviations of the price level from the expected price level.

Question 3

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.

Accepted Answer

The short-run aggregate supply curve is drawn for a given expected price level, as it reflects how much output producers are willing to supply at different price levels, assuming the expected price level (and other factors like wages and resource prices) is constant.

Question 4

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.

Accepted Answer

Prices do not adjust when there is perfect competition is not a valid reason for firms to not adjust their prices. In fact, in a perfectly competitive market, prices should adjust quickly and easily to changes in demand. The other options (costly to alter prices, not wanting to annoy frequent customers, and long-term contracts) are all valid reasons why firms may not instantly adjust their prices in response to changes in demand.

Question 5

Both models of aggregate supply discussed in Chapter 12 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

Accepted Answer

If the price level is lower than expected, firms may produce less because their revenues are lower than anticipated, causing output to fall below the natural rate of output.

Question 6

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.

Accepted Answer

According to the imperfect-information model, when the price level falls unexpectedly, producers may mistake this for a relative decrease in the price of their specific product rather than a general decrease in the price level. As a result, they might believe their goods are less valuable relative to others and decrease production in response.

Question 7

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.

Accepted Answer

The sticky-price model suggests that output deviates from its natural level when actual prices differ from expected prices. Therefore, when the actual price level equals the expected price level, output will be at its natural level, as firms' expectations are aligned with reality, allowing them to set prices appropriately.

Question 8

Both models of aggregate supply discussed in Chapter 12 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

Accepted Answer

When the price level is higher than expected, firms produce more than the natural rate of output because they perceive higher prices as an increase in demand for their products.

Question 9

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

Accepted Answer

The answer of According to the sticky-price model, other things...

Question 10

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.

Accepted Answer

In the sticky-price model, the relationship between output and the price level depends on the proportion of firms with flexible prices. When a shock occurs, some firms are able to adjust their prices immediately, while others are unable to do so due to sticky prices. The proportion of firms with flexible prices determines the extent to which output responds to changes in the price level.

Question 11

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.

Accepted Answer

The sticky-price model assumes that some firms do not adjust their prices instantly to changes in demand, which creates a temporary imbalance between aggregate demand and short-run aggregate supply. This market imperfection is based on the assumption that there are costs to changing prices, such as menu costs or search costs, which cause some firms to delay adjusting their prices in response to changes in demand.

Question 12

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)equal to
D)shift the

Accepted Answer

In the imperfect-information model, when the actual price level exceeds the expected price level, producers mistakenly perceive this as an increase in the relative price of their goods, leading them to increase production, thus output will be greater than the natural level of output.

Question 13

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.

Accepted Answer

In the sticky-price model, some firms are assumed to announce their prices in advance and stick to those prices for a period of time, while other firms adjust their prices based on observed prices and output in the market. Therefore, choice D is the best option.

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.

Accepted Answer

The answer of Based on the sticky-price model, the short-run...

Question 15

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.

Accepted Answer

The answer of According to the imperfect-information model, when the...

Question 16

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.

Accepted Answer

Robert Lucas found that aggregate demand has the biggest effect on output in countries where both aggregate demand and prices are most stable. This is likely because stable prices provide a more predictable economic environment, allowing firms to make better-informed production decisions in response to changes in demand. Additionally, stable prices may help to maintain consumer confidence and prevent inflationary pressures that could undermine the effectiveness of expansionary monetary policy.

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.

Accepted Answer

A high rate of inflation means that prices are changing frequently, so firms must adjust their prices more often. This implies that the short-run aggregate supply curve becomes steeper because it becomes harder for firms to increase output in response to changes in demand. As prices are already high, firms may not be able to increase output without facing higher costs. Therefore, the short-run aggregate supply curve becomes steeper as the rate of inflation rises.

Question 18

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.

Accepted Answer

The imperfect-information model suggests that in the short run, firms may have temporary misperceptions about the general price level, leading them to set the wrong price for their products. In the long run, they will adjust their prices to the level consistent with their production costs and the overall price level, resulting in a vertical long-run aggregate supply curve. This is different from the sticky wage and price models, which argue that wages or prices are slow to adjust downward in response to changes in demand or supply shocks, respectively. The procyclical real wage hypothesis is also a separate theory that suggests real wages tend to increase during economic expansions and decrease during contractions.

Question 19

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.

Accepted Answer

The imperfect-information model posits that producers may struggle to differentiate between changes in the overall level of prices and changes in relative prices. This difficulty arises because they might not have complete information about the prices of all goods and services in the economy, leading to potential misinterpretations of price signals.

Question 20

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.

Accepted Answer

In the imperfect-information model, the market imperfection is that firms confuse changes in the overall level of prices with changes in relative prices. This confusion leads to adjustments in production levels based on incorrect perceptions of real prices.

Quiz 12: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

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

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

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

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

Both models of aggregate supply discussed in Chapter 12 imply that if the price level is lower than expected, then output natural rate of output.

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

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

Both models of aggregate supply discussed in Chapter 12 imply that if the price level is higher than expected, then output natural rate of output.

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.

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

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:

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

According to the sticky-price model:

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

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

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

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

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

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

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: