Chapter 16

Question 1

Sticky-price model

Answer 1

The model of aggregate supply emphasizing the slow adjustment of the prices of goods and services

Question 2

What factors does a firm’s price depend on?

Answer 2

The overall level of prices P
The level of national income Y

Question 3

Imperfect-information model

Answer 3

The model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy

Question 4

How does the relationship between the price level and expected price level affect output?

Answer 4

If the price level is higher than the expected price level, output exceeds its natural level
If the price level is lower than the expected price level, output falls short of its natural level

Question 5

Phillips curve

Answer 5

A negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from the short-run aggregate supply curve

Question 6

Adaptive expectations

Answer 6

An approach that assumes that people form their expectation of a variable based on recently observed values of the variable

Question 7

Demand-pull inflation

Answer 7

Inflation resulting from shocks to aggregate demand

Question 8

Cost-push inflation

Answer 8

Inflation resulting from shocks to aggregate supply

Question 9

Sacrifice ratio

Answer 9

The number of percentage points of a year’s real GDP that must be forgone to reduce inflation by one percentage point

Question 10

Rational expectations

Answer 10

An approach that assumes people optimally use all available information - including information about current and prospective policies - to forecast the future

Question 11

Anchored expectations

Answer 11

Expectations that a variable will quickly return to a fixed level, regardless of what has happened to that variable recently

Question 12

Natural-rate hypothesis

Answer 12

The premise that fluctuations in aggregate demand influence output, employment, and unemployment only in the short run and that in the long run these variables return to the levels implied by the classical model

Question 13

Hysteresis

Answer 13

The long-lasting influence of history, such as on the natural rate of unemployment