Chapters 14

Question 1

Sticky-Price Model

Answer 1

Explanation for the upward sloping short run aggregate supply curve

emphasizes that firms don’t instantly adjust the prices they change in response to changes in demand

Question 2

Imperfect-Information Model

Answer 2

Assumes the markets clear

-all prices are free to adjust to balance supply and demand

Question 3

Phillips Curve

Answer 3

Inflation depends on 3 forces

• expected inflation
• cyclical unemployment
• supply shocks

Question 4

Adaptive Expectations

Answer 4

People form expectations of inflation based on recently observed inflation

Question 5

Demand-Pull Inflation

Answer 5

High aggregate demand is responsible for this inflation

Question 6

Cost-Push Inflation

Answer 6

Adverse supply shocks are typically events that push up the cost of production

Question 7

Sacrifice Ratio

Answer 7

The percentage of a years real GDP that must be forgone to reduce inflation by 1 percentage point

Question 8

Rational Expectations

Answer 8

Assumption that people optimally use all the available information which includes information about current government policies to forecast the future

Question 9

Natural Rate Hypothesis

Answer 9

Allows macroeconomists to separately study short run and long run developments in the economy

Question 10

Hysteresis

Answer 10

The long lasting influence of history on the natural rate