Chapter 14

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

Imperfect-information model

Answer 2

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 or services in the economy.

Question 3

Phillips curve

Answer 3

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 4

Adaptive expectations

Answer 4

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

Question 5

Demand-pull inflation

Answer 5

Inflation resulting from shocks to aggregate demand.

Question 6

Cost-push inflation

Answer 6

Inflation resulting from shocks to aggregate supply.

Question 7

Sacrifice ratio

Answer 7

The number of percentage points of a year’s real GDP that must be foregone to reduce inflation by 1 percentage point.

Question 8

Rational expectations

Answer 8

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

Question 9

Natural-rate hypothesis

Answer 9

The premise that fluctuations in the 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 10

Hysteresis

Answer 10

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