Question 1

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). The classical dichotomy, on the other hand, is the separation of nominal and real variables in macroeconomic models, assuming that changes in the money supply only affect nominal variables, while real variables are unaffected. Therefore, the classical dichotomy is not applicable for the Phillips curve.

Question 2

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

Accepted Answer

The Phillips curve shows the inverse relationship between unemployment and inflation. The steeper the short-run aggregate supply curve, the more quickly the equilibrium points move up and down the curve in response to changes in aggregate demand. As a result, changes in unemployment and inflation will be more closely correlated, making the Phillips curve steeper.

Question 3

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 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). Therefore, it expresses a short-run link between nominal and real variables.

Question 5

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the rate of unemployment.

Accepted Answer

The nonaccelerating inflation rate of unemployment (NAIRU) is the natural rate of unemployment when adaptive expectations are used to model inflation expectations in the Phillips curve. It is the rate of unemployment at which there is no tendency for inflation to accelerate or decelerate over time.

Question 6

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 shows a negative relationship between inflation and unemployment, meaning that as unemployment decreases (moves towards full employment), inflation tends to increase. Meanwhile, the short-run aggregate supply curve shows a positive relationship between the price level and output, meaning that as the price level increases, firms are willing to produce more output in the short run. Therefore, the correct choice is D, negative relationship between unemployment and inflation, and positive relationship between price level and output.

Question 7

According to the Phillips curve, other things being equal, inflation depends positively on all of the following except:

Accepted Answer

The answer of According to the Phillips curve, other things...

Question 8

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 9

The NAIRU is the:

Accepted Answer

The NAIRU stands for nonaccelerating inflation rate of unemployment. It refers to the level of unemployment at which inflation is stable and not accelerating. It is a key concept in macroeconomics and helps policymakers set monetary policy. Choices A, B, and D are not accurate definitions of the NAIRU.

Question 10

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 11

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 surplus of goods in the market, leading to lower prices as suppliers reduce prices to clear the inventory. This means that the price level is less than the expected price level. Hence, option B is the correct choice.

Question 12

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 13

Inflation inertia is represented in the aggregate supply and aggregate demand model by continuing upward shifts in the:

Accepted Answer

The answer of Inflation inertia is represented in the aggregate...

Question 14

If the equation for a country's Phillips curve is π = .02 - .8(u - .05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (.04)?

Accepted Answer

Substitute u = 0.04 into the equation: π = 0.02 - 0.8(0.04 - 0.05) = 0.02 + 0.008 = 0.028, which is above 2 percent.

Question 15

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 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 short-run aggregate supply curve, output is related to unexpected movements in the price level. In the Phillips curve, unemployment is related to unexpected movements in the inflation rate.

Question 17

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

Accepted Answer

Adaptive expectations assume that people base their expectations of inflation on recently observed inflation. They update their expectations as more recent information becomes available. Therefore, option C is the correct answer. Option A is incorrect because people may not have access to economic models, and even if they do, those models may not always be accurate. Option B is also incorrect because people may not always trust or have access to expert opinions. Option D is obviously incorrect.

Question 18

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

Accepted Answer

The Phillips curve relates inflation and unemployment, and is primarily influenced by expected inflation, the deviation of unemployment from its natural rate, and supply shocks. The exchange rate is not a direct factor in the Phillips curve.

Question 19

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

According to the theory of monetary policy, an unexpected monetary contraction will decrease the money supply, which will increase the interest rates, decrease the aggregate demand, and decrease the output and the price level in the short run. In the long run, the expected price level will also decrease because of the decrease in aggregate demand. However, the level of output will eventually return to its natural level due to the adjustment of prices and wages.

Question 20

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.

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