Aggregate Supply

Question 1

Y = Aggregate supply =

Answer 1

YBAR - a (P – EP)

Question 2

YBAR - a (P – EP) This equation shows that when Y is different from YBAR _____

Answer 2

prices will change

Question 3

EP

Answer 3

expected price

Question 4

P

Answer 4

is the actual price

Question 5

so EP should be equal to P otherwise

Answer 5

P will change

Question 6

alpha(a) is a positive

Answer 6

parameter

Question 7

YBAR is the natural rate

Answer 7

of output

Question 8

P =

Answer 8

= EP + 1/a (Y – YBAR)

Question 9

If Y>YBAR

Answer 9

we expect EP to be higher than P as we expect prices to rise

Question 10

If EP increases

Answer 10

then the firms will raise their prices as well

Question 11

Reasons for sticky price

Answer 11

ong-term contract between firms and customers – menu
costs (such as cost of replacing the labels) – firms not wishing to annoy customers
with constant price change

Question 12

In the sticky price model, they set price equal to the ______ and ______of output

Answer 12

expected output, natural
rate

Question 13

s =

Answer 13

the number of firms with sticky price model which is between 0-1

Question 14

P = s [EP] (1+s) [P−a (Y + Y)]

Answer 14

this is the average price for the economy

Question 15

EP level can go up for many reasons

Answer 15

such as going to war so G will increase – or
these is a drought so supply will fall

Question 16

Imperfect information model – assumption made are:

Answer 16

All wages and prices are flexible
- Supplier produces one good and consumers consume many
- Supplier knows the nominal price level of its product but not the overall price
leve

Question 17

the EP price has risen which is why they are buying
more as the apples are relatively cheaper

Answer 17

in the long-run suppliers will actually increase price and reduce
production – as they cannot supply equal to the demand

Question 18

In the long run supply will always be equal to

Answer 18

Y = F (K, L)

Question 19

In the long run supply is on Ybar when

Answer 19

n K and
L are at full employment

Question 20

so if the price at a certain level that is where quantity is and

Answer 20

that is what is supplied

Question 21

If we know the expected price, then we cannot draw a SRAS curve because suppliers
will make sure price is equal

Answer 21

to expected price

Question 22

If price is higher than expected price – and we assume the sticky-wage theory

Answer 22

then
workers have already signed contracts – so prices will be higher, and wages remain
the same – this will mean labour is cheaper so will hire more workers

Question 23

SRAS curve to shift back at a higher price

Answer 23

– this is stagflation

Question 24

P - P-1 = LnP – LnP-1 = ∆P/P =

Answer 24

inflation rate

Question 25

If we cut money supply and increase the OCR

Answer 25

this will
increase employment and lower the inflation as the AD falls

Question 26

Philips Curve =

Answer 26

u = un – (1/ß) (π – Eπ)

Question 27

The shift in the demand curve is mainly caused by a change in _____

Answer 27

money demand

Question 28

demand curve is

Answer 28

is the SRPC

Question 29

Adaptive inflation is

Answer 29

people assuming inflation based on past figures so Eπ = π-1

Question 30

π = π−1 −β (u −un)

Answer 30

this is the inflation inertia suggesting that without any shocks in
the economy inflation will continue at the same rate

Question 31

Cost push inflation

Answer 31

– inflation resulting in supply shocks – adverse supply shock
raising production costs causing prices to rise such as drought

Question 32

Demand pull inflation

Answer 32

inflation due to demand shocks – upward pull of the
demand curve as money demand is high

Question 33

n the short run it is assumed that Eπ

Answer 33

remains the same

Question 34

In order to get the expected inflation rate we look at what the inflation rate
would be at

Answer 34

u = un

Question 35

In the long run unemployment is equal to the natural rate of unemployment

Answer 35

which represents the LRPC

Question 36

If Eπ increases

Answer 36

this will shift the SRPC upwards