Question 1

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.

Accepted Answer

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Question 2

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.

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Question 3

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 all of 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.

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Question 4

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?

Accepted Answer

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b. What factor...

Question 5

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

Accepted Answer

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Question 6

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

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Question 7

The Phillips curve in Lowland takes the form π = .04 - .5 (u - .05), where π is the actual inflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form π = .08 - .5 (u - .05). The current unemployment rate in both countries is 9 percent (.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?

Accepted Answer

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Question 8

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.

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

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.

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?

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

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

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.