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Exam 9: An Introduction to the Short Run

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Question 1

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The Phillips curve in the text shows the ________ relationship between ________ and ________.

A) positive; the change in inflation; short-term economic fluctuations
B) negative; the change in inflation; short-term economic fluctuations
C) positive; inflation; unemployment
D) negative; inflation; unemployment
E) negative; the change in inflation; unemployment

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Question 2

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If output is above potential, so that is positive, the change in the inflation rate will be negative, so inflation will fall over time.

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Question 3

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John Maynard Keynes is famous for saying, "In the long run ________."

You are given the U.S. employment data in Figure 9.3 below by your uncle, and he is curious to know what was happening to the economy in 1996-2000 and 2007-2009. You might not remember, but you tell him you can explain what happened to the employment rate, the output gap, and inflation. What do you tell him? Your uncle likes economics, so some mathematical relationships would probably help your argument.Figure 9.3: Percent Change in U.S. Employment: 1980-2015

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, is ________ percent.

Which of the following is NOT an example of a short-term macroeconomic shock?

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2009 to 2010 was a period of:

Potential output is defined as:

Refer to the following figure when answering the following questions. Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics) -Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2001 to 2002 was a period of:

According to the Phillips curve presented in the text, a negative macroeconomic shock:

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, is 4 percent.

Defining as current output, as potential output, and as short-run fluctuations, the text uses the following equation to measure the fluctuations component of output: .

If an economy has a horizontal Phillips curve and experiences an expansion, inflation:

According to the data presented in the text, the largest negative output gap since 1970 was ________ percent, which occurred during the ________ recession.

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the change in inflation is 3 percent, the gap would be ________ percent.

According to the Phillips curve presented in the text, a positive macroeconomic shock decreases the rate of inflation.

The relationship between actual output in an economy, the long-run component, and the short-run component is given as Long-run trend =Current output + Short-run fluctuations.

A country with a steep Phillips curve experiences a smaller increase in the rate of inflation than a country with a relatively flat Phillips curve, assuming the size of the positive demand shock in each country is the same.

A decline in long-term productivity implies that an economy requires more resources to produce goods; therefore, as costs of production rise, we should see an acceleration in inflation.

The short-run model is built on which of the following? i. The economy is constantly being hit by so-called shocks. ii. Economic policy has no impact on output. iii. There is trade-off between output and inflation.