AS stuff

Question 1

What is the natural rate hypothesis

Answer 1

• Theory proposed by Milton Friedman that there is a natural rate of unemployment that the economy tends to in the long run

Question 2

What happens in long run in NRH

Answer 2

• The economy self corrects and output returns to its potential

Question 3

What does NRH mean for policy

Answer 3

• Any demand side policy will be inflationary

Question 4

What type of expectations in NRH

Answer 4

Adaptive

Question 5

What does adaptive expectations mean in SR when there is a demand side policy

Answer 5

• Ad shifts out and price expectationd do not change which means an increase in output and prices

Question 6

What happens in the LR with adaptive expectations

Answer 6

Price expectations adapt upwards in the long run and AS will shift left, thus output returns to normal level but with inflation now

Question 7

What are the policy implications of rational expectations

Answer 7

• When demand side policy is enacted, AS shifts inward as soon as policy is enacted and price rises and output stays the same

Question 8

Derive the AS curve with money illusion

Answer 8

• The demand curve shifts to the right reflecting an increase in prices
• Labour supply curve shifts up less than the demand curve as workers are suffering money illusion
• This means equilibirum employment increases from N1 to N2

Question 9

How is the steepness of the AS curve impacted by the degree of money illusion

Answer 9

• If there is little money illusion, the AS curve is steeper

Question 10

So in terms of impact on employment, what does money illusion do

Answer 10

The more money illusion, the higher employment from a demand shift

Question 11

What do some economists think about the slope of the supply curve

Answer 11

• Upward sloping in the SR
• Vertical in the LR