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Macreconomics: Policy and Practice (Mishkin)

Chapter 11 Aggregate Supply and the Phillips Curve


11.1 The Phillips Curve
1) The idea behind the Phillips curve is that ________.
A) tight labor markets lead to inflationary pressures
B) hen the unemployment rate is lo! ages ill increase
C) hen firms raise ages to attract ne orkers! prices ill also increase
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
') The idea behind the Phillips curve is that ________.
A) tightness in the labor market raises ages but has little impact on prices
B) hen the unemployment rate is lo! ages ill decrease
C) hen firms raise ages to attract ne orkers! prices ill also increase
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
() The idea behind the Phillips curve is that ________.
A) hen the unemployment rate is lo ages ill decrease
B) tightness in the labor market puts upard pressures on ages and prices
C) hen firms raise ages to attract ne orkers! prices decrease
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
)) The idea behind the Phillips curve is that ________.
A) tightness in the labor market puts donard pressures on ages and prices
B) hen the unemployment rate is lo ages ill increase
C) hen firms raise ages to attract ne orkers! prices decrease
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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-) ________ is .are) the endogenous variable.s) in the Phillips curve.
A) #/pected inflation
B) ,nflation
C) The natural rate of unemployment
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
0) ,n the 110+s! the Phillips curve as ________.
A) a very popular e/planation for inflation fluctuations
B) consistent ith a clear negative relationship beteen inflation and unemployment
C) suggestive of a permanent trade off beteen inflation and unemployment
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
2) ,n the 110+s! the Phillips curve as ________.
A) consistent ith a positive relationship beteen inflation and unemployment
B) suggestive of a temporary trade off beteen inflation and unemployment
C) a very popular e/planation for inflation fluctuations
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
3) ,n the 110+s! advocates of the Phillips curve suggested ________ .
A) an 4optimal4 goal of 15 unemployment and 15 to '5 inflation rates could be achieved
B) a 4realistic4 goal of 25 unemployment and 05 to 25 inflation rates could be achieved
C) a 4nonperfectionist4 goal of (5 unemployment and )5 to -5 inflation rates could be
achieved
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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1) The Phillips curve as ________.
A) never very popular in policy circles
B) influential in efforts to bring the unemployment rate don to lo levels
C) generally confirmed in the 112+s! hen lo unemployment persisted despite rising inflation
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
1+) The Phillips curve as ________.
A) adopted by economic policy teams in the 6ennedy and 7ohnson administrations
B) influential in efforts to bring the unemployment rate don to lo levels
C) discredited in the 112+s! hen both inflation and unemployment ere relatively high
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
11) 8ilton 9riedman and #dmund Phelps contributed hich insight.s) to Phillips curve analysis:
A) that firms and orkers care about nominal! not real ages
B) that ages have a one;to;one relationship ith inflation
C) that! in the long run! the level of unemployment is independent of inflation
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
1') 8ilton 9riedman and #dmund Phelps contributed hich insight.s) to Phillips curve analysis:
A) that a 4realistic4 goal of 25 unemployment and 05 to 25 inflation rates could be achieved
B) that! in the long run! sticky ages and staggered prices prevent unemployment from
remaining lo
C) that firms and orkers care about real ages
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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1() 8ilton 9riedman and #dmund Phelps contributed hich insight.s) to Phillips curve analysis:
A) that firms and orkers care about nominal! not real ages
B) that age changes have a one;to;one relationship ith changes in e/pected inflation
C) that! in the long run! prices are fle/ible! so unemployment cannot remain above <ero
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
1)) 8ilton 9riedman and #dmund Phelps contributed hich insight.s) to Phillips curve analysis:
A) that firms and orkers care about real ages
B) that inflation and e/pected inflation influence each other
C) that! in the long run! the level of unemployment is independent of inflation
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
1-) 8ilton 9riedman and #dmund Phelps contributed hich insight.s) to Phillips curve analysis:
A) that inflation is directly related to e/pectations of future inflation
B) that inflation is negatively related to the unemployment gap
C) that in the long run unemployment ill be at the natural rate
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
10) =hat can be concluded from 8ilton 9riedman and #dmund Phelps> e/pectations;augmented
Phillips curve:
A) that there is no long run tradeoff beteen unemployment and inflation
B) that there is a short run tradeoff beteen unemployment and inflation
C) that there are to types of Phillips curves
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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12) =hat can be concluded from 8ilton 9riedman and #dmund Phelps> e/pectations;augmented
Phillips curve:
A) that there is a long run tradeoff beteen unemployment and inflation
B) that there is a short run tradeoff beteen unemployment and inflation
C) that inflation is positively related to the unemployment gap
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
13) ,n 8ilton 9riedman and #dmund Phelps> e/pectations;augmented Phillips curve! ________.
A) unemployment ill! in the long run! reach the natural rate
B) in the long run! e/pected inflation ill reach the ?A,&@
C) inflation is positively related to the unemployment gap
") all of the above
#) none of the above
Anser$ A
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
11) The Aong;&un Phillips Curve is vertical! suggesting that ________.
A) alloing inflation to rise ill not succeed in keeping unemployment lo
B) changes in unemployment have no lasting impact on inflation
C) shifts of the short;run Phillips curve impact inflation! but have no effect on unemployment
") all of the above
#) none of the above
Anser$ A
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'+) Bbservations of inflation in the 112+s prompted hat further addition to the Phillips curve:
A) price shocks
B) e/pected inflation
C) personal consumption e/penditures
") all of the above
#) none of the above
Anser$ A
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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'1) =hich of the folloing might cause an upard shift of the modern Phillips curve:
A) an increase in oil prices
B) an increase in the price of imports
C) age agreements that include compensation for inflation
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'') ________ ill cause a movement along the modern Phillips curve.
A) An increase in oil prices
B) An increase in the price of imports
C) =age agreements that include compensation for inflation
") all of the above
#) none of the above
Anser$ #
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'() Bn the modern Phillips curve! the initial impact of an increase in the orld price of steel is
shon by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
") a downward movement along the Phillips curve to higher unemployment rates
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
')) Bn the modern Phillips curve! the initial impact of government policies to stimulate the
economy is shon by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
") a downward movement along the Phillips curve to higher unemployment rates
#) none of the above
Anser$ A
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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'-) Bn the modern Phillips curve! the initial impact of productivity improvements that loer the
costs of production is shon by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
") a downward movement along the Phillips curve to higher unemployment rates
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'0) Bn the modern Phillips curve! the beginning of a recession is shon by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
") a downward movement along the Phillips curve to higher unemployment rates
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'2) As ages and prices become more fle/ible ________.
A) ages becomes less responsive to unemployment deviations from the natural rate
B) it becomes easier to differentiate the short;run from the long;run Phillips curve
C) inflation becomes more responsive to unemployment deviations from the natural rate
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
'3) ,f ages and prices become e/tremely fle/ible ________.
A) there is no trade off beteen inflation and unemployment
B) unemployment can hardly deviate from the natural rate
C) it becomes very difficult to differentiate the short;run from the long;run Phillips curve
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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'1) As ages and prices become more sticky ________.
A) inflation becomes more responsive to unemployment deviations from the natural rate
B) ages become less responsive to unemployment deviations from the natural rate
C) it becomes more difficult to differentiate the short;run from the long;run Phillips curve
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
(+) As ages and prices become more sticky ________.
A) the short;run Phillips curve gets flatter
B) ages become less responsive to unemployment deviations from the natural rate
C) it becomes easier to differentiate the short;run from the long;run Phillips curve
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
(1) ,f e/pectations about inflation are adaptive! they are ________.
A) formed by looking at the future
B) likely to change rapidly
C) based on past inflation
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
(') ,f e/pectations about inflation are adaptive! they are ________.
A) not based on all available! relevant information
B) backard;looking
C) likely to change sloly
") all of the above
#) none of the above
Anser$ "
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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(() ,f e/pectations about inflation are adaptive! they are ________.
A) Cuick to respond to price shocks
B) consistent ith the notion of sticky prices
C) based on changes in productivity
") all of the above
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
()) According to the accelerationist Phillips curve! ________.
A) e/pectations adDust continually to the latest information
B) increases in inflation cause the unemployment gap to iden
C) inflation ill change so long as an unemployment gap persists
") all of the above
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
(-) An e/ample of a price shock is ________.
A) an increase in ages as a result of higher e/pected inflation
B) the arrival of immigrants seeking employment
C) the decline in autonomous spending that results from rising unemployment
") all of the above
#) none of the above
Anser$ #
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
(0) Eiven the accelerationist Phillips curve F G ; +.( .@ ; 0) H I! suppose that inflation in the
preceding period as ( percent! unemployment is 0 percent! and there is a price shock of '
percent. The current inflation rate is ________.
A) ( percent
B) +.' percent
C) - percent
") 1 percent
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
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(2) Eiven the accelerationist Phillips curve F G ; +.( .@ ; 0) H I! suppose that inflation in the
preceding period as ( percent! unemployment is 2 percent! and there is no price shock. The
current inflation rate is ________.
A) '.2 percent
B) ( percent
C) +.1 percent
") (.( percent
#) none of the above
Anser$ A
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
(3) Eiven the accelerationist Phillips curve F G ; +.2 .@ ; -) H I! suppose that inflation has
increased from 3 percent to 1+ percent. ,f the unemployment rate is ) percent! then the price
shock is ________.
A) '.2 percent
B) +.0 percent
C) 1.( percent
") 1 percent
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
(1) Based on the data in this table!

U
period 1 0 1 )
period ' 3 + '.'
period ( 3 ' '.)
if the inflation rate in period <ero had been ( percent! then the accelerationist Phillips curve is
________.
A) F G ; 1.3 .@ ; 2) H I
B) F G ; 1.1 .@ ; 0) H I
C) F G ; +.1 .@ ; 0) H I
") F G ; +.) .@ ; 1) H I
#) none of the above
Anser$ C
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
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)+) Based on the data in this table!

U
period 1 0 1 )
period ' 3 + (.'
period ( 3 ' ).)
,f the natural rate of unemployment is steady at 2 percent! and! in period four! there is no price
shock and unemployment is 3 percent! then the inflation rate in period ) ill be ________
percent.
A) ).)
B) (.0
C) (.)
") 1.0
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
)1) Based on the data in this table!

U
period 1 0 1 )
period ' 2 + ).-
period ( 0 ' ::
,f the natural rate of unemployment is steady at 3 percent! hat is the inflation rate in period (:
A) 3.- percent
B) 2.- percent
C) -.- percent
") 0.( percent
#) none of the above
Anser$ B
Topic$ 11.1 The Phillips Curve
AAC%B$ Analytical %kills
)') =hy is there no long;run trade;off beteen unemployment and inflation:
Anser$ Because hen the labor market is so tight as to cause ages and prices to rise! the
resulting inflation intensifies the pressure on ages and prices .by reducing the real age and
increasing e/pected inflation). %ince the inflation in no ay 4balances4 or 4compensates4 for the
lo level of unemployment! the condition of 4too lo4 unemployment is unsustainable in the
long run.
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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)() =hat are price shocks: =hy ere they not included in the original formulation of the
Phillips curve: =hy ere they added to the modern Phillips curve:
Anser$ ,n the Phillips curve! inflation is determined by e/pected inflation and the
unemployment gap. A price shock is anything other than those to factors that has an impact on
inflation! such as a change in import prices. At first! Phillips and other economists ere
interested in the relationship beteen unemployment and inflation! rather than in devising a
comprehensive e/planation addressing all causes of inflation. Bnce it became clear that a
persistent unemployment gap ill cause inflation to change repeatedly .shifts of the short;run
Phillips curve)! it as possible to ask ho much of inflation is attributable to labor market
conditions! hich reCuires recognition of all other factors that influence inflation.
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
))) Jo do you suppose most people form an e/pectation of future inflation: ,s that method
consistent ith the assumption of adaptive e/pectations:
Anser$ Aike any mechanic in the Bron/! most people distil a 4gut opinion4 from their personal
e/perience and hat they read in the papers! hear from others! etc. =hile 4e/pert4 analysis of
proDected trends has some influence! greater eight is placed! probably! on hether inflation has
seemed recently high! or rising! or declining! or lo! and e/pected inflation is an e/trapolation
from those observations. Adaptive e/pectations e/aggerates to an e/clusive reliance on the past!
but seems a reasonable appro/imation of the actual method.
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
)-) A. =. Phillips> 11-3 paper e/amined unemployment and age groth. =hat role! if any!
does age groth play in the modern Phillips curve:
Anser$ The modern Phillips curve relates unemployment to inflation! rather than ages. This
allos inclusion of e/pected inflation and price shocks as causes of inflation! in addition to the
unemployment gap. But the central idea remains that changes in inflation are driven by age
changes. =hen ages are sticky! then unemployment gaps have a small impact on inflation!
hile fle/ible ages cause large changes in inflation.
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
)0) %uppose the government loers unemployment by hiring more government orkers. Jo
does it matter hether ages and prices are sticky:
Anser$ As long as ages and prices are sticky! then the decrease in the unemployment rate ill
not cause a substantial increase in ages. Joever! if orkers throughout the economy perceive
an opportunity to seek an increase in their real age! employers may need to comply in order to
retain and attract Cualified orkers. ,f nominal ages increase! producers ill need to raise
prices. The resulting inflation ill cause e/pected inflation to rise! sparking further increases in
the nominal age.
Topic$ 11.1 The Phillips Curve
AAC%B$ &eflective Thinking
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11.' The Aggregate %upply Curve
1) ,n the long run ________.
A) the amount of output an economy can produce is determined by real variables like capital!
labor and technological advances
B) aggregate supply is fi/ed at the potential level of output
C) there is enough time for prices to fully adDust so the classical dichotomy holds
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
') ,n the long run ________.
A) the aggregate supply is vertical ith respect to output
B) the Phillips curve is vertical ith respect to unemployment
C) fluctuations in the inflation rate have no impact on output and unemployment
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
() ,n the long run ________.
A) the aggregate supply is vertical ith respect to unemployment
B) the Phillips curve is vertical at a given level of e/pected inflation
C) the economy reaches the potential output level consistent ith the natural rate of
unemployment
") all of the above
#) none of the above
Anser$ C
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
)) The natural rate of output is ________.
A) independent of the inflation rate
B) alays loer than potential output
C) unrelated to the natural rate of unemployment
") all of the above
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
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-) =hen ages and prices are completely fle/ible ________.
A) inflation is determined by e/pected inflation and price shocks
B) labor hoarding occurs
C) unemployment is disconnected from the real economy
") all of the above
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
0) =hich of the folloing shos a negative relationship beteen the output and unemployment
gaps:
A) the A% curve
B) the Phillips curve
C) Bkun>s la
") the classical dichotomy
#) none of the above
Anser$ C
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
2) =hich of the folloing never assumes! either implicitly or e/plicitly! independence beteen
nominal and real variables:
A) the A% curve
B) the Phillips curve
C) Bkun>s la
") the classical dichotomy
#) none of the above
Anser$ C
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
3) =hich of the folloing best appro/imates Bkun>s la:
A) a 1 percent increase in output leads to a ' percent decrease in unemployment
B) a 1 percent increase in output leads to a 1 percent decrease in unemployment
C) a ' percent increase in output leads to a ) percent increase in unemployment
") a ' percent increase in output leads to a 1 percent decrease in unemployment
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
1)
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1) According to Bkun>s la! an increase in hich of the folloing is associated ith an increase
in unemployment:
A) inflation
B) output
C) e/pected inflation
") autonomous e/penditure
#) potential output
Anser$ #
Topic$ 11.' The A% curve
1+) =hich of the folloing is true in regards to Bkun>s la:
A) employment does not increase commensurately ith output rises because firms tend to hoard
labor
B) hen demand increases! firms tend to ork their employees harder and longer
C) it is Bkun>s prediction of the negative relationship beteen the output and unemployment
gaps that allos the modern Phillips curve to be translated into the A% curve
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
11) The short;run aggregate supply curve shos that inflation ill change as a result of changes
in ________.
A) output
B) potential output
C) e/pected inflation
") price shocks
#) all of the above
Anser$ #
Topic$ 11.' The A% curve
1') The short;run aggregate supply curve shos that a change in inflation ill cause .a)
change.s) in ________.
A) output
B) potential output
C) e/pected inflation
") price shocks
#) all of the above
Anser$ C
Topic$ 11.' The A% curve
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1() According to the short;run aggregate supply curve! if output minus potential output eCuals
<ero! then ________.
A) unemployment might be <ero
B) inflation might be stable
C) e/pected inflation must be stable
") price shocks must be <ero
#) none of the above
Anser$ B
Topic$ 11.' The A% curve
1)) ,n the short run ________.
A) inflation is negatively related to the output gap
B) if output rises above its potential level! the unemployment rate falls and firms ill loer
ages
C) if the labor market tightens! firms ill raise prices more rapidly to keep up ith upard age
pressures and inflation ill ensue
") all of the above
#) none of the above
Anser$ C
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
1-) =hich statement.s) is .are) consistent ith a positive relationship beteen inflation and the
output gap:
A) ,f output rises above its potential level! the unemployment rate falls and firms ill raise
ages and prices more rapidly.
B) ,n the short run! the A% curve is upard sloping.
C) Through Bkun>s la! the negative relationship beteen the output and unemployment gaps
allos the modern Phillips curve to be translated into the A% curve.
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
10) ,n the short run ________.
A) the more fle/ible ages and prices are! the more inflation responds to the output gap
B) the more sticky ages and prices are! the more difficult to tell the difference beteen the
short run and long run aggregate supply curves
C) if ages and prices are sticky! aggregate output is alays at its potential level
") all of the above
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
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12) ,f the output gap is constant at minus ' and the inflation rate has fallen from 0 percent to -
percent! then ne/t period>s short;run aggregate supply curve might be ________.
A) F G - ; +.- .1( ; 1-)
B) F G - H +.- .1( ; 1-)
C) F G ) H +.- .1( ; 1-)
") F G - H ' .11 ; 1-)
#) none of the above
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
13) =hen a price shock occurs! the inflation rate is affected ________.
A) only in the period of the price shock
B) only in the period after the price shock
C) only if the price shock causes a change in output
") only if the price shock persists for more than one period
#) none of the above
Anser$ #
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
11) =hen a price shock has occurred! inflation returns to its pre;shock rate ________.
A) in the period folloing the price shock
B) in the period hen output has returned to its pre;shock rate
C) once the output gap has returned to <ero
") only in the long run
#) none of the above
Anser$ #
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
'+) %uppose the output gap is <ero! and policy makers ish to reduce the inflation rate from 1+
percent to - percent. =hich of these policies seems best:
A) contractionary policies to reduce output at least - percent belo potential output
B) a convincing declaration of the inflation rate target! so that e/pected inflation falls to -
percent
C) no policy actionK inflation ill fall on its on! eventually
") no policy actionK inflation ill converge to its long;run rate! regardless of policy
#) price and age controls to counteract their stickiness
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
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'1) ,f Bkun>s la is @ ; @
n
G ; +.- .L ; L
P
)! and potential output gros at '5 per year! then a
recession that causes output to decrease by one percentage point ill cause unemployment to
increase by ________.
A) 1 percentage point
B) 1.- percentage points
C) ' percentage points
") ( percentage points
#) one;half percentage point
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
'') ,f Bkun>s la is @ ; @
n
G ; +.0 .L ; L
P
)! and the Phillips curve is F G F
e
; '.- .@ ; @
n
) H I!
then the short;run aggregate supply curve is ________.
A) F G F
e
; 1.- .L ; L
P
) H I
B) F G F
e
H ).' .L ; L
P
) H I
C) F G F
e
; '.- .L ; L
P
) H I
") F G F
e
; '.- .L H L
P
) H I
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
'() ,f the short;run aggregate supply curve is F G F
e
; 1.' .L ; L
P
) H I! output eCuals potential
output and there is a price shock of minus to! then the inflation rate is ________.
A) '
B) F
e
; '
C) minus '
") minus '.)
#) none of the above
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
')) Technological advances lead to ________.
A) a shift of the short run A% curve up
B) a shift of the long run A% curve to the left
C) an upard movement along the long run A% curve
") all of the above
#) none of the above
Anser$ #
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
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'-) ,f the natural rate of unemployment declines ________.
A) labor is more heavily utili<ed
B) potential output increases
C) the long run aggregate supply curve shifts to the right
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
'0) ,f the 9ed ere to announce that fighting inflation is not a high priority for the immediate
future ________.
A) households might e/pect higher inflation
B) the short run aggregate supply ould shift upards
C) firms might begin raising their prices to keep up ith e/pected inflation
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
'2) ,n '++- hurricane 6atrina devastated large portions of the Eulf Coast economy. 8any
refineries ent offline disrupting oil refining and distribution. =hat do you think as a likely
result:
A) the restricted supply constituted a cost push shock that ould have shifted the long run A%
curve to the right
B) the restricted supply constituted a cost push shock that ould have shifted the short run A%
curve to the left
C) the restricted supply constituted a cost push shock that ould have meant an upard
movement along the Phillips curve
") all of the above
#) none of the above
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
'3) ________ may cause a shift of the long;run aggregate supply curve.
A) A maDor earthCuake
B) A change in e/pected inflation
C) A price shock
") all of the above
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
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'1) ,n the short run! if current output remains persistently above potential ________.
A) inflation ill rise causing a movement along the aggregate supply curve
B) e/pected inflation ill rise causing an upard shift of the aggregate supply curve
C) the aggregate supply curve ill shift until current output returns to its potential level
") all of the above
#) none of the above
Anser$ "
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
Aggregate Supply Curves (1)
(+) Based on the graph above! if the economy is at point '! then .assuming no price shocks and
no changes in actual and potential output) the inflation rate ne/t period ill be ________
percent.
A) -
B) (.-
C) ).-
") )
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
'+
Copyright * '+1' Pearson #ducation! ,nc.
(1) Based on the graph above! a cause of movement from point 1 to point ' might be ________.
A) a positive price shock
B) government policy that loers unemployment
C) an increase in potential output
") an increase in e/pected inflation
#) none of the above
Anser$ B
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
(') Based on the graph above! suppose the economy is at point '! then output falls to 1+ and
there is a price shock of one percent. The inflation rate ne/t period ill be ________ percent.
A) -
B) (.-
C) ).-
") )
#) none of the above
Anser$ C
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
(() Based on the graph above! the short;run aggregate supply curve is ________.
A) F G ' H 1.- .L ; 1+) H I
B) L G 3
(
'
H
(
'
.F) H I
C) F G ' H .L ; 11) H I
") F G (.- H ' .L ; 1+) H I
#) none of the above
Anser$ A
Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
()) ,f the short;run aggregate supply curve is shifting don repeatedly! it is rather likely that
________.
A) output is declining repeatedly! relative to potential output
B) the long;run aggregate supply curve is shifting to the left
C) negative price shocks are recurring
") all of the above
#) none of the above
Anser$ #
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
'1
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(-) =hat factors cause a shift in the long;run aggregate supply curve: 8ight any of these cause
the short;run aggregate supply curve to shift! also:
Anser$ The factors that shift the long;run aggregate supply curve are .1) the si<e of the capital
stock! .') the labor supply! .() available technology! and .)) the natural rate of unemployment
.hich determines ho much of the labor supply is employed hen ages and prices are
fle/ible). A change in long;run aggregate supply is a change in potential output! hich changes
the output gap .ceteris paribus)! hich shifts the short;run aggregate supply curve! so that the
rate of inflation at hich the long;run and short;run curves intersect does not change.
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
(0) The short;run aggregate supply curve is F G F
e
H +.3 .L ; '+) H I. %uppose inflation last year
as - percent! current output is '+! and there is a price shock of ' percent. %uppose! further! that
potential output rises next year to '1! hile output remains at '+ and ne/t year>s price shock is
<ero. Calculate and e/plain ne/t year>s inflation.
Anser$ Current inflation is - H +.3 .'+ ; '+) H ' G 2 percent. ?e/t year! inflation is 2 H +.3 .'+
; '1) H + G 0.'. 8oving from the current to ne/t year! short;run aggregate supply has shifted up
because of the increase in e/pected inflation from - to 2 percent! and shifted don by +.3 / the
increase in potential output G +.3 / 1 G +.3. The negative output gap corresponds! thru Bkun>s
la! to an increase in the unemployment gap. #ither the natural rate of unemployment has
declined .a possible cause of the increase in potential output)! or the failure of actual output to
gro along ith potential means that unemployment has risen. #ither ay! this loosening of the
labor market causes ages and prices to rise less rapidly.
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
''
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Aggregate Supply Curves (2)
(2) Bn the graph above!
.a) dra the ne short;run aggregate supply curve that results hen the economy has been at
point ' for one period! ceteris paribus .do not label the ne output level or inflation rate)
.b) on the original A% curve! add a point 4(4 here output is 1+.-. Bn the vertical a/is! label the
rate of inflation that corresponds to output of 1+.-.
.c) dra the ne short;run aggregate supply curve that results hen the economy has been at
point ( for one period! ceteris paribus .do not label the ne output level or inflation rate)
Anser$

Topic$ 11.' The A% curve
AAC%B$ Analytical %kills
'(
Copyright * '+1' Pearson #ducation! ,nc.
(3) =hy are changes in the output gap larger than changes in the unemployment gap: =hy is the
relationship e/pressed in Bkun>s la not affected by inflation or e/pected inflation:
Anser$ Common sense suggests that output and unemployment must be negatively;related.
Joever! the link beteen the to is employment. %ince the productivity of employed orkers
can vary! output has e/tra fle/ibility. 8oreover! even hen employment is changing along ith
output! not all of the employment change corresponds to a change in unemployment! since ne
employees might be ne entrants to the labor force! and employees ho leave their Dobs might
leave the labor force and not be counted among the unemployed. All these connections beteen
output! employment! the labor force! and unemployment are realK they do not involve any price
adDustments.
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
(1) @nprecedented stimulative policies throughout the global economy have sparked debate over
the inflationary implications. "efenders of the policies argue that! even if the policies raise
inflationary e/pectations! actual inflation ill remain lo. Critics charge that current policies are
nearly certain to result in e/cessive inflation. =hat does the aggregate supply curve have to say:
Anser$ As long as the negative output gap persists! rising e/pectations of inflation ill not
translate into much actual inflation. Joever! if the output gap shrinks in absolute value as
policy makers intend! nothing ill insulate inflation from e/pectations. To avoid the critics>
prediction of e/cessive inflation! policy makers must someho manage e/pectations .and avoid
alloing a positive output gap from emerging).
Topic$ 11.' The A% curve
AAC%B$ &eflective Thinking
11.( %hifts in Aggregate %upply Curves
1) There are no Cuestions for this section.
Anser$
')
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