Question 1

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, if there is an unexpected monetary contraction that shifts aggregate demand from AD₁ to AD₃, then the long-run neutrality of money is represented by the movement from:

Accepted Answer

The long-run neutrality of money implies that in the long run, changes in the money supply do not affect real output. In this case, the unexpected monetary contraction shifts aggregate demand from AD1 to AD3, causing the economy to move from point A to B in the short run. However, in the long run, the economy will return to its original long-run equilibrium at point A, with output equal to Y and the price level equal to P1.

Question 2

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run; and in the long run the expected price level will ______, causing the level of output to return to the natural level.

Accepted Answer

An unexpected monetary contraction will lead to a decrease in the money supply and an increase in interest rates. This will cause a decrease in consumer and investment spending, and hence a decrease in aggregate demand. As a result, output and the price level will also decrease in the short run. In the long run, however, the expected price level will also decrease due to the decrease in aggregate demand, causing the level of output to ultimately return to the natural level. Hence, option C is the correct choice.

Question 3

Along any aggregate supply curve, there is only one:

Accepted Answer

The aggregate supply curve represents the total quantity of goods and services that firms are willing and able to produce at different price levels, assuming all other factors remain constant. The expected price level is a key determinant of the position of the aggregate supply curve, as it influences production costs and firms' willingness to supply goods. Unlike the expected price level, which is a single value for any given position of the aggregate supply curve, unemployment levels, inflation levels, and output levels can vary along the curve as the actual price level changes.

Question 4

The Phillips curve expresses a short-run link:

Accepted Answer

The Phillips curve shows the relationship between inflation (a nominal variable) and unemployment (a real variable) in the short run. Thus, it represents a link between nominal and real variables.

Question 5

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output ______ natural rate of output.

Accepted Answer

Both the sticky-wage model and the sticky-price model of aggregate supply suggest that if the actual price level is lower than what was expected, firms will produce less than they would have at the expected price level. This is because in the sticky-wage model, real wages are higher than anticipated, making labor more expensive and leading firms to reduce output. In the sticky-price model, some firms have set prices based on the expected price level and cannot adjust quickly, leading to reduced sales and production. Therefore, output falls below the natural rate of output.

Question 6

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

Accepted Answer

When the level of output is less than the natural level of output, there is a decrease in supply which leads to an increase in prices due to a shortage of goods in the market. Therefore, the price level is less than the expected price level.

Question 7

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, ______, and a real variable, ______.

Accepted Answer

The Phillips curve shows the relationship between inflation (a nominal variable) and unemployment (a real variable). Therefore, it does not fit into the classical dichotomy, which separates nominal and real variables. Choices A and B both involve nominal variables on both sides of the equation, while choice D swaps the positions of the nominal and real variables.

Question 8

Use the following to answer questions : Exhibit: AD-AS Shifts -(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to $\bar { Y }$ and the price level equal to P₁, if there is an unexpected monetary contraction that shifts aggregate demand from AD₁ to AD₃, then the short-run nonneutrality of money is represented by the movement from:

Accepted Answer

The answer of Use the following to answer questions :
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Question 9

According to the Phillips curve, other things being equal, inflation depends positively on:

Accepted Answer

The Phillips curve posits a negative relationship between the rate of unemployment and the rate of inflation, implying that as unemployment decreases, inflation increases. Expected inflation is a key component of this relationship, as it directly influences wage-setting behavior and price-setting behavior, thereby affecting actual inflation. Choices B, C, and D do not align with the Phillips curve's principles.

Question 10

The relationship between short-run aggregate supply curves and Phillips curves is that there:

Accepted Answer

The short-run aggregate supply curve shows the relationship between the price level and the quantity of output supplied in the short run. The Phillips curve shows the relationship between the rate of inflation and the rate of unemployment. In the short run, there is a trade-off between inflation and unemployment. An increase in the price level will lead to an increase in the quantity of output supplied, but it will also lead to an increase in the rate of inflation. Conversely, a decrease in the price level will lead to a decrease in the quantity of output supplied, but it will also lead to a decrease in the rate of inflation.

Question 11

Which of the following will shift the aggregate supply curve up to the left?

Accepted Answer

An increase in the expected price level can shift the aggregate supply curve up to the left because it increases the costs of production, anticipating higher prices for inputs, which reduces the quantity of goods and services supplied at every price level.

Question 12

All of the following are ways that the modern Phillips curve differs from the relationship observed by A. W. Phillips in 1958 except that the modern Phillips curve:

Accepted Answer

The answer of All of the following are ways that...

Question 13

The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______.

Accepted Answer

In the short-run, monetary nonneutrality can occur due to sticky prices and wages, leading to changes in output and employment levels. However, in the long-run, the economy reaches equilibrium and monetary neutrality prevails, where changes in the money supply only affect nominal variables such as prices and not real variables such as output and employment.

Question 14

The NAIRU is the:

Accepted Answer

NAIRU stands for nonaccelerating inflation rate of unemployment. It represents the equilibrium rate of unemployment at which inflation remains stable or constant, without accelerating or decelerating. In other words, it is the rate of unemployment below which inflation tends to rise and above which inflation tends to fall. This concept is important for policymakers when they set monetary policy and target inflation rates.

Question 15

If the short-run aggregate supply curve is steep, the Phillips curve will be:

Accepted Answer

The slope of the Phillips curve is determined by the responsiveness of nominal wages to changes in unemployment. If the short-run aggregate supply curve is steep, it indicates that changes in the price level have a significant impact on the quantity of output supplied in the short run. In this case, firms will be more willing to adjust wages downwards as unemployment rises to maintain profitability, leading to a steeper Phillips curve.

Question 16

Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.

Accepted Answer

In the context of macroeconomics, the short-run aggregate supply curve illustrates how output (or real GDP) responds to changes in the price level, particularly when those changes are unexpected. Similarly, the Phillips curve demonstrates the relationship between unemployment and inflation, where unexpected movements in the inflation rate can affect unemployment levels. Thus, option A correctly pairs output with the price level along the short-run aggregate supply curve and unemployment with the inflation rate along the Phillips curve.

Question 17

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

Accepted Answer

The Phillips curve illustrates a negative relationship between inflation and unemployment, indicating that higher inflation is associated with lower unemployment and vice versa. The short-run aggregate supply curve shows a positive relationship between the price level and output, meaning that as the price level increases, the quantity of goods and services supplied also increases.

Question 18

Based on the Phillips curve, unexpected movements in inflation are related to ______, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.

Accepted Answer

The Phillips curve suggests that unexpected movements in inflation are related to unemployment, as it posits an inverse relationship between the rate of inflation and the unemployment rate. Similarly, the short-run aggregate supply curve indicates that unexpected movements in the price level are related to output, as it shows the relationship between the price level and the quantity of goods and services that firms are willing to produce and sell.

Question 19

In the short-run, if the price level is greater than the expected price level, then in the long run the aggregate:

Accepted Answer

In the long run, if the actual price level is greater than the expected price level, firms adjust their expectations upwards. This leads to higher wage demands and other costs, which shifts the long-run aggregate supply curve upward (or to the left), reflecting higher production costs.

Question 20

The Phillips curve depends on all of the following forces except:

Accepted Answer

The Phillips curve describes the inverse relationship between inflation and unemployment. It is based on the premise that as unemployment falls, inflation rises, and vice versa. This relationship is influenced by factors such as expected inflation, the deviation of unemployment from its natural rate, and supply shocks. However, the Phillips curve does not depend on the current exchange rate.

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

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to in the short run; and in the long run the expected price level will , causing the level of output to return to the natural level.