AS & Philips Curve

Question 1

Answer 1

Question 2

In our previous model we assumed price level was constant in sr (horizontal sras curve)

Now we consider 2 models of AS in sr:

Answer 2

Sticky price model
Imperfect information model

Question 3

Question 4

Sticky price model

Answer 4

firms do not instantly adjust prices in response to demand changes
Reasons for sticky prices: long term contracts between firms and customers, menu costs, firms do not want to annoy consumers with constant price changes
Assumptions: firms set own prices

Question 5

Question 6

Answer 6

Question 7

Question 8

Imperfect information model assumptions

Answer 8

All wages & prices are perfectly flexible and markets clear
each supplier produces one good and consumes many
each supplier knows one good and consumes many

Question 9

Answer 9

Question 10

Answer 10

Question 11

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Question 13

Phillips curve

Answer 13

Inflation depends on expected inflation
Cyclical unemployment - deviation of the actual rate of unemployment form the natural rate

Question 14

Question 15

Adaptive expectations

Answer 15

people form expectations of future inflation based on recently observed inflation

Question 16

Question 17

Rational expectations

Answer 17

people base expectations on all available information including information about current prospective future policies

Question 18

Demand Pull and Cost push inflation

Answer 18

Demand pull - inflation resulting from demand shocks, positive shocks to AD cause unemployment to fall below its natural rate which pulls inflation up, negative demand shocks pull inflation rate down

Cost push - inflation resulting from supply shocks, adverse supply shocks raise production = increase prices = inflation

Question 19

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Question 21

Question 22

Sacrifice ratio

Answer 22

measures % of a years real GDP that must be forgone to reduce inflation by 1&. Usually 5 - for evert 1% fall in inflation, 5% of GDP must be sacrificed

Question 23

Answer 23

Question 24

Sticky wage model

Answer 24

Assumes firms and workers negotiate contracts and fix nominal wage before they know what price level will be

Question 25