Question 1

What three premises does the short-run model operate under?

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Question 2

If output is above potential, so that  
is positive, the change in the inflation rate will be negative, so inflation will fall over time.

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The answer of If output is above potential, so that...

Question 3

An increase in planned investment expenditures is a short-term economic shock.

Accepted Answer

An increase in planned investment expenditures is typically considered a component of fiscal or monetary policy adjustments rather than a short-term economic shock. Economic shocks are usually unexpected events that affect the economy suddenly and significantly, such as natural disasters or sudden financial crises, whereas planned investment expenditures are deliberate economic strategies.

Question 4

You are given the U.S. employment data in Figure 9.3 below by your uncle, and he is curious to know what was happening to the economy in 1996-2000 and 2007-2009. You might not remember, but you tell him you can explain what happened to the employment rate, the output gap, and inflation. What do you tell him? Your uncle likes economics, so some mathematical relationships would probably help your argument.Figure 9.3: Percent Change in U.S. Employment: 1980-2015

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Question 5

How is a recession "officially" determined?

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Question 6

A country with a steep Phillips curve experiences a smaller increase in the rate of inflation than a country with a relatively flat Phillips curve, assuming the size of the positive demand shock in each country is the same.

Accepted Answer

A steep Phillips curve indicates a strong inverse relationship between unemployment and inflation, suggesting that a given demand shock leads to a smaller increase in inflation and a larger decrease in unemployment compared to a flat Phillips curve, where the same demand shock would result in a larger increase in inflation and a smaller decrease in unemployment.

Question 7

Figure 9.8: Cyclical Unemployment: 1980-2015  (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
-The figure above shows cyclical unemployment for the years 1980-2015. Using your best guess by looking at the figure, what was the output gap in 1992, 2003, 2010, and 2015? What is the change in inflation for those years?

Accepted Answer

The answer of Figure 9.8: Cyclical Unemployment: 1980-2015  (Source:...

Question 8

A decline in long-term productivity implies that an economy requires more resources to produce goods; therefore, as costs of production rise, we should see an acceleration in inflation.

Accepted Answer

If an economy requires more resources to produce goods due to a decline in long-term productivity, it can lead to higher costs of production. Higher production costs can increase the prices of goods, contributing to inflationary pressures.

Question 9

Consider the following three figures, which show the Phillips curve relationship for the 1970s, 1980s, and 1990s. The output gap is on the x-axis and the change in inflation, $\Delta$ $\pi$, is on the y-axis. Explain what each of these Phillips curves tells us about each of the three decades. In which period would fighting inflation be the most difficult?Figure 9.9: Phillips Curve Relationship, 1970s  
Figure 9.10: Phillips Curve Relationship, 1980s  
Figure 9.11: Phillips Curve Relationship, 1990s

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The answer of Consider the following three figures, which show...

Question 10

What does the Phillips curve represent?

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Question 11

What does Okun's law state?

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Question 12

Figure 9.7: The Output Gap 1980-2015  (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
-Figure 9.7 above shows the output gap for the years 1960-2015. Using the Phillips curve and Okun's law, discuss the impacts on inflation and unemployment for the years 1997-2000 and 2008-2015. From this analysis, what is the relationship between unemployment and inflation?

Accepted Answer

The answer of Figure 9.7: The Output Gap 1980-2015 ...

Question 13

When current output rises above potential output, we hire fewer workers, which reduces the costs of production. The change in inflation will be negative.

Accepted Answer

When current output rises above potential output, it typically indicates an overheating economy, leading to increased demand for labor and potentially higher wages, which can contribute to positive inflation as costs of production may rise, not fall.

Quiz 9: An Introduction to the Short Run