Question 1

According to the sticky-price model:

Accepted Answer

In the sticky-price model, some firms are assumed to set their prices in advance, while others adjust their prices according to observed prices and output. This combination of price-setting behavior results in price stickiness and helps to explain why changes in demand or supply may not immediately lead to corresponding changes in prices.

Question 2

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

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 3

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

Accepted Answer

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer does not change production. This is because the producer's expectations are being met, and thus there is no need to adjust production levels.

Question 4

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

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 5

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

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 6

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:

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.

Question 7

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

Accepted Answer

Prices do not adjust when there is perfect competition is incorrect because in a perfectly competitive market, prices are constantly adjusting to changes in supply and demand. The other options are valid reasons why firms may not adjust their prices immediately.

Question 8

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.

Accepted Answer

In the sticky-price model, if a larger proportion of firms have sticky prices, they cannot adjust their prices quickly in response to an unexpected price increase. This leads to a greater increase in output as firms with flexible prices increase production to meet demand.

Question 9

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

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 10

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:

Accepted Answer

In the sticky-price model, some firms do not adjust their prices instantly to changes in demand, leading to short-run rigidity in prices.

Question 11

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

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 12

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

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 13

Using the sticky-price model, the higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:

Accepted Answer

According to the sticky-price model, a higher rate of inflation causes firms to have to adjust their prices more frequently. This means that the short-run aggregate supply curve becomes steeper because firms are not able to adjust their prices immediately and must wait until their next price adjustments. Thus, a high rate of inflation makes the short-run aggregate supply curve steeper.

Question 14

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

Accepted Answer

The short-run aggregate supply curve is steeper when a greater proportion of firms have flexible prices, as these firms can adjust their prices more readily in response to changes in demand or cost conditions.

Question 15

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.

Accepted Answer

Both the short-run and long-run aggregate supply models suggest that if the price level is higher than expected, firms will increase production, leading output to exceed the natural rate of output temporarily. This is because firms perceive the higher prices as an opportunity to make higher profits, prompting them to expand production.

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

The question asks about the effect of aggregate demand on output in different countries, and specifically asks about the relationship between aggregate demand and prices. According to the economist Robert Lucas, aggregate demand has the biggest effect on output in countries where aggregate demand and prices are most stable. This makes sense because stability in both aggregate demand and prices provides a more predictable economic environment, which can lead to greater confidence and investment by businesses and consumers. In contrast, if either aggregate demand or prices are highly variable, it can create uncertainty and volatility in the economy, which can negatively affect output.

Question 18

The basic aggregate supply equation implies that output exceeds natural output when the price level is:

Accepted Answer

When the price level is greater than the expected price level, firms are incentivized to produce more, leading to output exceeding natural output.

Question 19

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

Accepted Answer

According to the imperfect-information model, when the price level is greater than the expected price level, firms will produce more than the natural level of output in order to take advantage of the higher prices. Therefore, output will be greater than the natural level of output.

Question 20

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

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.

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