revision questions chapter 28 pt3

Question 1

rational expectations

Answer 1

A rational expectation is the most accurate forecast available.

Question 2

People know that the inflation rate will decrease from 7 per cent to 3 per cent. As a result, the

Answer 2

nominal interest rate falls by 4 percentage points

Question 3

Last year’s price level was 120 and since then there has been a 5 per cent inflation. This year’s price level is

Answer 3

126.

working out:
120 x 0.05= 6
120 + 6 = 126

Question 4

By itself, a fall in the price of oil shifts the

Answer 4

short-run aggregate supply curve rightward (because lower oil prices reduce production costs= higher output) and does not shift the aggregate demand curve.

Question 5

The short-run Phillips curve intersects the long-run Phillips curve at the

Answer 5

expected inflation rate.

Question 6

According to the quantity theory of money,

Answer 6

V (velocity of money) and potential GDP are not affected by the quantity of money.

Question 7

Which of the following could start a demand-pull inflation?

Answer 7

• An increase in government expenditures.