Question 1

Assume that an economy operates according to the sticky-wage model.The nominal wage was set to make labour supply and labour demand equal when the expected price level equaled 120 (as measured by the consumer price index).a.Use a graph of the labour market to illustrate what happens to the quantity of labour employed if the actual price level over the time period when wages are stuck equals 110.b.Use a graph of the production function to illustrate how the quantity of output produced changes if the actual price level equals 110 when the expected price level is 120.c.Given the unexpectedly low price level,will this economy be operating above,below,or at the natural rate?

Accepted Answer

The answer of Assume that an economy operates according to...

Question 2

In the sticky-wage model,if labour contracts specify that the nominal wage be fully indexed for inflation,the short-run aggregate supply schedule will:
A) slope upward to the right.
B) be vertical.
C) be horizontal.
D) shift upward.

Accepted Answer

If labour contracts specify that the nominal wage is fully indexed for inflation, then a rise in the price level will immediately lead to an equal rise in nominal wages. Hence, there will be no change in the real wage, and firms will have no incentive to change their level of employment. As a result, the short-run aggregate supply will be vertical.

Question 3

The government can lower inflation with a low sacrifice ratio if the:
A) money supply is reduced slowly.
B) public has adaptive expectations.
C) short-run aggregate supply schedule is relatively flat.
D) public believes that policymakers are committed to reducing inflation.

Accepted Answer

The answer of The government can lower inflation with a...

Question 4

If only unanticipated changes in the money supply affect real GDP,the public has rational expectations,and everyone has the same information about the state of the economy,then:
A) monetary policy can be used to systematically stabilize output.
B) monetary policy cannot be used to systematically stabilize output.
C) a policy of keeping the money supply constant is optimal.
D) a policy of adjusting the money supply in response to the state of the economy is optimal.

Accepted Answer

If only unanticipated changes in the money supply affect real GDP, then changes in the money supply that are anticipated by the public will not have any effect on real GDP. Therefore, if the public has rational expectations and everyone has the same information about the state of the economy, any attempts by the central bank to use monetary policy to stabilize output will be futile. This is because any anticipated changes in the money supply will already be incorporated into individuals' decisions regarding consumption and investment, and will not have any additional effect on output. As a result, the optimal policy in this case would be to not try to stabilize output using monetary policy, and instead allow the economy to adjust to any unanticipated changes in the money supply.

Question 5

If the short-run aggregate supply curve is assumed to be horizontal,international capital flows are infinitely elastic,and the nominal exchange rate is fixed,then the big,comprehensive model corresponds to which of the following special cases?
A) classical open economy
B) IS-LM model
C) Mundell-Fleming with floating exchange rate
D) Mundell-Fleming with fixed exchange rate

Accepted Answer

The Mundell-Fleming model with a fixed exchange rate assumes a horizontal short-run aggregate supply curve, infinitely elastic international capital flows, and a fixed nominal exchange rate, matching the conditions given.

Question 6

If the short-run aggregate supply curve is assumed to be horizontal and there are no international capital flows,then the big,comprehensive model corresponds to which of the following special cases?
A) classical closed economy
B) aggregate demand and aggregate supply
C) IS-LM model
D) Mundell-Fleming with floating exchange rate

Accepted Answer

The IS-LM model is a macroeconomic model that explains the relationship between interest rates and real output in the goods and services market and the money market. In the short run, with a horizontal aggregate supply curve and no international capital flows, the IS-LM model is applicable as it focuses on the interaction between the goods market (IS curve) and the money market (LM curve) in a closed economy.

Question 7

In the sticky-wage model,if labour contracts specify that the nominal wage be partially indexed for inflation,the short-run aggregate supply schedule will be:
A) vertical.
B) steeper than it would be without indexing.
C) flatter than it would be without indexing.
D) horizontal.

Accepted Answer

Indexing nominal wages for inflation makes wages more responsive to price level changes, leading to a steeper short-run aggregate supply curve compared to a situation without indexing.

Question 8

If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income,then the big,comprehensive model corresponds to which of the following special cases?
A) classical closed economy
B) aggregate demand and aggregate supply
C) IS-LM model
D) Mundell-Fleming with floating exchange rate

Accepted Answer

The assumption of a horizontal short-run aggregate supply (SRAS) curve and proportional money demand to income corresponds to the basic assumptions of the aggregate demand and aggregate supply (AD-AS) model, which is a comprehensive macroeconomic framework that analyzes the interaction between aggregate demand (AD) and aggregate supply (AS) in determining overall macroeconomic outcomes such as inflation and output. The other options do not include these assumptions, and are either more specialized models (IS-LM, Mundell-Fleming) or classical frameworks (classical closed economy) that do not incorporate modern macroeconomic concepts such as short-run aggregate supply.

Question 9

Assume that a firm has a production function Y = 1,000L^1/2,where Y is output and L is labour.Labour demand is L^d = 250,000(P/W)² and labour supply is L^s = 31,250(W/P).Initially,there is an equilibrium in which output is 250,000,employment is 62,500,the nominal wage is 20,and the price level is 10.Demand for output is 250,000 at the given price,so all output is sold.Suddenly,demand at the given price drops to 200,000,but the firm does not lower its price.It lowers output and lays off workers.a.Assuming that the firm cannot produce for inventory,how much will the firm want to produce? b.Assuming output equals the amount given under part a,what employment force will the firms want to hire? c.If the firm continues to pay the same nominal and real wage,how much more labour will workers wish to supply than the firm will want to hire?

Accepted Answer

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Question 10

If the short-run Phillips curves are nonlinear,with each Phillips curve flatter in the negative inflation range 
I: maintaining zero inflation on average forces the average unemployment rate to exceed the natural rate;
II: forcing the unemployment rate to equal the natural rate must result in ever-accelerating inflation.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Accepted Answer

If the short-run Phillips curves become flatter in the negative inflation range, it implies that the trade-off between inflation and unemployment becomes less favorable. As a result, maintaining zero inflation on average would require a higher average unemployment rate, which exceeds the natural rate (I). However, forcing the unemployment rate to equal the natural rate does not necessarily result in ever-accelerating inflation, as the Phillips curve might still slope upward in the positive inflation range, albeit with a steeper slope. Therefore, II is not true.

Question 11

Assume that an economy's production function is Y = 1,000L^1/2,so when the marginal product of capital is equated to the real wage the labour demand curve is L = 250,000(P/W)².The labour supply curve is L = 31,250(W/P).The real wage that solves these equations is W/P = 2.Assume that the expected price level is 10,so that a nominal wage contract setting the wage at 20 is agreed to,making the expected real wage 2.If the price level turns out to be 10,62,500 workers will be hired and output will be 250,000.a.If the actual price level turns out to be 20,what will the actual real wage be? b.According to the labour demand curve,how much labour will be demanded if the actual real wage is at the level given in part a? c.According to the production function,if the amount of labour given in part b is actually hired,how much will production be?

Accepted Answer

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Question 12

Assume that an economy has the Phillips curve $\pi$ = $\pi$_-₁ - 0.5(u - 0.06).How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points? A) 20 B) 10 C) 5 D) 2.5

Accepted Answer

To reduce inflation by 5 percentage points, we need to move down along the Phillips curve by 5 percentage points. Using the given Phillips curve equation, we can see that a 1 percentage point increase in unemployment (u) reduces inflation (π) by 0.5 percentage points.

Therefore, to reduce inflation by 5 percentage points, we need to increase unemployment by (5/0.5) = 10 percentage point-years.

Hence, the answer is B) 10.

Question 13

If the short-run aggregate supply curve is assumed to be horizontal and international capital flows are infinitely elastic,then the big,comprehensive model corresponds to which of the following special cases?
A) classical closed economy
B) aggregate demand and aggregate supply
C) IS-LM model
D) Mundell-Fleming with floating exchange rate

Accepted Answer

Mundell-Fleming with floating exchange rate assumes infinitely elastic international capital flows and a horizontal short-run aggregate supply curve. This model analyzes the effects of monetary and fiscal policies on output, exchange rates, and interest rates in an open economy.

Question 14

The endogenous variables of the big,comprehensive model include the level of output,the natural level 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.

Accepted Answer

The real and nominal interest rates are endogenous variables in the big, comprehensive model because they are determined within the model as a result of interactions between other variables such as output, savings, investment, and inflation. The other options, including the money supply, world price level, and government purchases, may be exogenous variables that influence the endogenous variables in the model, but they are not themselves determined within the model.

Question 15

Assume that an economy has the Phillips curve $\pi$ = $\pi$_-₁ - 0.5(u - 0.06).Then the natural rate of unemployment is: A) 0.5. B) 0.12. C) 0.06. D) 0.03.

Accepted Answer

The natural rate of unemployment is the level of unemployment that exists when the economy is in a long-run equilibrium. In this case, the Phillips curve is given by: 
π = -0.5(u - 0.06) 
To find the level of u at which there is no inflationary or deflationary pressure, we need to find the level of u at which π = 0. 
0 = -0.5(u - 0.06) 
0 = -0.5u + 0.03 
0.5u = 0.03 
u = 0.06 
Therefore, the natural rate of unemployment is 0.06.

Question 16

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 corresponds to which of the following special cases?
A) classical closed economy
B) classical open economy
C) IS-LM model
D) Mundell-Fleming with floating exchange rate

Accepted Answer

The assumptions of price expectations being correct, money demand being proportional to income, and net capital flow being infinitely elastic correspond to the classical open economy model. The big comprehensive model includes additional variables and assumptions, such as imperfect competition and sticky prices, which are not present in the classical open economy model. The IS-LM model and Mundell-Fleming model with a floating exchange rate also include additional variables and assumptions not present in the classical open economy model. Therefore, the best choice is B - classical open economy.

Question 17

Assume that an economy is governed by the Phillips curve $\pi$ = $\pi$^e - 0.5(u - 0.06),where $\pi$ = (P - P_-₁)/P_-₁,$\pi$^e = (P^e - P_-₁)/P_-₁,and 0.06 is the natural rate of unemployment.Further assume $\pi$^e = $\pi$_-₁.Suppose that,in period zero,$\pi$ = 0.03 and $\pi$^e = 0.03-that is,that the economy is experiencing steady inflation at a 3-percent rate.a.Now assume that the government decides to impose whatever demand is necessary to cut unemployment to 0.04.Suppose the government follows this policy for periods 1 through 5.Create a table of $\pi$and $\pi$^e for these five periods.b.Assume that,for periods 6 through 10,the government decides to hold unemployment at 0.06.Create another table of $\pi$ and $\pi$^e for these five periods.Is there any reason to expect the inflation rate to go back to 0.03? c.If the government persisted in its behavior under part a,do you think the public would continue for long forming expectations according to $\pi$^e = $\pi$_-₁? Why?

Accepted Answer

The answer of Assume that an economy is governed by...

Question 18

If price expectations are assumed to be correct,money demand is proportional to income,and there are no international capital flows,then the big,comprehensive model corresponds to which of the following special cases?
A) classical closed economy
B) classical open economy
C) IS-LM model
D) Mundell-Fleming with floating exchange rate

Accepted Answer

The assumptions given in the question correspond to the basic classical theory of a closed economy where money demand is proportional to income and prices are stable. The model does not consider international capital flows or exchange rate interactions, making it a closed economy model. The IS-LM and Mundell-Fleming models incorporate these factors.

Question 19

In the sticky-price model,if no firms have flexible prices,the short-run aggregate supply schedule will:
A) be vertical.
B) be steeper than it would be if some firms had flexible prices.
C) slope upward to the right.
D) be horizontal.

Accepted Answer

In the sticky-price model, if no firms have flexible prices, then prices are "sticky" or rigid, meaning they cannot adjust quickly to changes in demand or supply. As a result, the short-run aggregate supply schedule will be horizontal because firms are unable to increase output to meet any increase in demand at the existing price level. Similarly, they are unable to decrease output to adjust to any decrease in demand at the existing price level. Therefore, the answer is D- the short-run aggregate supply schedule will be horizontal.

Question 20

All of the following are exogenous variables in the big,comprehensive model except the:
A) world interest rate.
B) labour force.
C) world real interest rate.
D) domestic price level.

Accepted Answer

The domestic price level is typically considered an endogenous variable in economic models, as it is determined within the model by the interaction of supply and demand factors.

Quiz 13: Aggregate Supply and the Short-Run

In the sticky-wage model,if labour contracts specify that the nominal wage be fully indexed for inflation,the short-run aggregate supply schedule will:

The government can lower inflation with a low sacrifice ratio if the:

If only unanticipated changes in the money supply affect real GDP,the public has rational expectations,and everyone has the same information about the state of the economy,then:

If the short-run aggregate supply curve is assumed to be horizontal,international capital flows are infinitely elastic,and the nominal exchange rate is fixed,then the big,comprehensive model corresponds to which of the following special cases?

If the short-run aggregate supply curve is assumed to be horizontal and there are no international capital flows,then the big,comprehensive model corresponds to which of the following special cases?

In the sticky-wage model,if labour contracts specify that the nominal wage be partially indexed for inflation,the short-run aggregate supply schedule will be:

If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income,then the big,comprehensive model corresponds to which of the following special cases?

Assume that an economy has the Phillips curve $\pi$ = $\pi$ _-₁ - 0.5(u - 0.06) .How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points?

If the short-run aggregate supply curve is assumed to be horizontal and international capital flows are infinitely elastic,then the big,comprehensive model corresponds to which of the following special cases?

The endogenous variables of the big,comprehensive model include the level of output,the natural level of output,the price level,and:

Assume that an economy has the Phillips curve $\pi$ = $\pi$ _-₁ - 0.5(u - 0.06) .Then the natural rate of unemployment is:

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 corresponds to which of the following special cases?

If price expectations are assumed to be correct,money demand is proportional to income,and there are no international capital flows,then the big,comprehensive model corresponds to which of the following special cases?

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

All of the following are exogenous variables in the big,comprehensive model except the: