Chapter 14. Aggregate Supply and the Short-run Tradeoff Between Inflation and Unemployment

Chapter 14. Aggregate Supply and the Short-run Tradeoff Between Inflation and Unemployment 1.The basic aggregate supply equation implies that output exceeds natural output when the price level is: A) low. B) high. C) less than the expected price level. D) greater than the expected price level. 2.Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except: A) it is costly to alter prices. B) they do not want to annoy their frequent customers. C) prices do not adjust when there is perfect competition. D) some prices are set by long-term contracts between firms and customers. 3.According to the sticky-price model: A) all firms announce their prices in advance. B) all firms set their prices in accord with observed prices and output. C) some firms set their prices according to the aggregate supply equation. D) some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output. 4.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. A) greater; increase B) smaller; increase C) greater; decrease D) smaller; decrease 5.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: A) some firms do not adjust their prices instantly to changes in demand. B) expectations are formed adaptively rather than rationally. C) firms confuse changes in the overall level of prices with changes in relative prices. D) the real wage adjusts to bring labor supply and labor demand into equilibrium. 6.In the sticky-price model, the relationship between output and the price level depends on: A) the proportion of firms with flexible prices. B) the target real wage rate. C) the target nominal wage rate. D) the implicit agreements between workers and firms. 7.Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the: A) target nominal-wage rate. B) target real-wage rate. C) proportion of firms with flexible prices. D) proportion of firms with sticky prices. 8.According to the sticky-price model, output will be at the natural level if: A) firms expect a high price level and the demand for goods is high. B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) the price level equals the expected price level. D) expectations are formed adaptively, but not if expectations are formed rationally. 9.According to the sticky-price model, deviations of output from the natural level are deviations of the price level from the expected price level. A) positively associated with B) negatively associated with C) not related to D) equal to 10.The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on: A) sticky wages. B) sticky prices. C) temporary misperceptions about prices. D) procyclical real wages. 11.The imperfect-information model assumes that producers find it difficult to distinguish between changes in: A) real wages and nominal wages. B) the overall level of prices and relative prices. C) the overall level of prices and the expected level of prices. D) cost-push inflation and demand-pull inflation. 12.According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer: A) increases production. B) does not change production. C) decreases production. D) hires more workers. 13.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: A) some firms do not adjust their prices instantly to changes in demand. B) contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions. C) firms confuse changes in the overall level of prices with changes in relative prices. D) the real wage adjusts to bring labor supply and labor demand into equilibrium. 14.According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer: A) increases production. B) does not change production. C) decreases production. D) hires more workers. 15.After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand: A) and prices are most stable. B) and prices are most variable. C) is most stable but prices are most variable. D) is most variable but prices are most stable. 16.According to the imperfect-information model, in countries in which there is a great deal of variability of prices: A) the response of output to unexpected changes in prices will be relatively large. B) the response of output to unexpected changes in prices will be relatively small. C) output will respond negatively to an unexpected rise in prices. D) output will not respond to an unexpected change in prices. 17.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: A) has no effect on the slope of the short-run aggregate supply curve. B) should make the short-run aggregate supply curve flatter. C) makes the short-run aggregate supply curve steeper. D) causes prices to be sticky. 18.According to the imperfect-information model, when the price level is greater than the expected price level, output will the natural level of output A) be greater than B) be less than C) be equal to D) shift the 19.The short-run aggregate supply curve is drawn for a given: A) output level. B) price level. C) expected price level. D) level of aggregate demand. 20.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. A) exceeds the B) falls below the C) equals the D) moves to a different 21.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. A) exceeds the B) falls below the C) equals the D) moves to a different 22.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. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 23.The model of aggregate demand and aggregate supply is consistent with short-run monetary and long-run monetary . A) neutrality; neutrality B) nonneutrality; nonneutrality C) neutrality; nonneutrality D) nonneutrality; neutrality 24.Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is: