Consider the Efficiency Wage story. Suppose we had several periods of 0 inflation. Then if we had a decrease in Aggregate Demand that caused a decrease in the Aggregate Price level, we would see which of the following in the short run? Select one of the following multiple choice answers and explain why you chose that answer. a. higher inflation and higher unemployment. b. lower inflation (which would be deflation given our premise) and higher unemployment. c. higher inflation and lower unemployment. d. lower inflation (which would be deflation given our premise) and lower unemployment. e. none of the above.

Consider the Efficiency Wage story. Suppose we had several periods of 0 inflation. Then if we had a decrease in Aggregate Demand that caused a decrease in the Aggregate Price level, we would see which of the following in the short run? Select one of the following multiple choice answers and explain why you chose that answer. a. higher inflation and higher unemployment. b. lower inflation (which would be deflation given our premise) and higher unemployment. c. higher inflation and lower unemployment. d. lower inflation (which would be deflation given our premise) and lower unemployment. e. none of the above.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Expectations Theory And The Economy

Section: Chapter Questions

Problem 1WNG

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Consider the Efficiency Wage story. Suppose we had several periods of 0 inflation. Then if we had a decrease in Aggregate Demand that caused a decrease in the Aggregate Price level, we should see which of the following in the short run? Explain your answer. a. inflation and higher employment b. lower inflation (which would be deflation given our premise) and higher employment c. inflation and lower employment d. lower inflation (which would be deflation given our premise) and lower employment e. none of the above
The Phillips curve in Lowland takes the form of π = 0.04 − 0.6(u − 0.05), where π is the actualinflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form ofπ = 0.08 − 0.4(u − 0.05). The current unemployment rate in both countries is 9 percent (0.09). For both countries, analyze the impact on inflation of a 2% decrease in unemployment? In which country will policymakers face a bigger trade-off if they try to reduce unemployment in the shortrun? Why
Suppose that a rise in consumer spending causes an expansion. 1. On the following graph, shift a curve or adjust the point to reflect the short-run effect of the rise in consumer spending. (Please use the image attached) 2. In the short run, inflation rises? falls? and unemployment rises? falls?. Now suppose that over time, expected inflation changes in the same direction that actual inflation changes. 3. After the expansion is over, the economy faces a worse? better? set of inflation–unemployment combinations.
true or false Suppose that the central bank lost credibility in the sense that people no longer believe its inflation target (that is, inflation expectations are not `anchored’). In this case, both short-run output and long-run output do not increase in response to a permanently higher inflation target.
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According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what they produce had increased, so they would increase production. increased, so they would decrease production. decreased, so they would increase production. decreased, so they would decrease production.
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The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.
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If policymakers decrease aggregate demand, then in the short run the price level Answer falls and unemployment rises. and unemployment fall. and unemployment rise. rises and unemployment falls.