Question

• 1. Rising inflation causes quantity demanded to​ decline, because​ ________.
  • households and businesses are reluctant to spend when prices rise
  • higher inflation causes the IS curve to shift to the left
  • the central bank raises the nominal interest rate by more than the increase in expected inflation
  • all of the above
  • none of the above

• 2. Based on the expectations - augmented Phillips​ curve, if the natural rate of unemployment is​ 0.06, and if the actual inflation rate exceeds the expected inflation​ rate, then the unemployment rate is
  • more than 0.06.
  • less than 0.06
  • 0.06.
  • 0.06 plus 0.5 times the difference between actual and expected inflation.

• 3. The aggregate demand curve shifts to the left when there is​ ________.
  • autonomous tightening of monetary policy
  • an increase in the nominal interest rate
  • an increase in inflation
  • all of the above
  • none of the above

• 4. In the long run​ ________.
  • there is enough time for prices to fully adjust so the classical dichotomy holds
  • the amount of output an economy can produce is determined by real variables like​ capital, labor and technological advance
  • aggregate supply is fixed at the potential level of output
  • all of the above
  • none of the above

• 5. The aggregate demand curve shifts to the right when there is​ ________.
  • a decrease in the nominal interest rate
  • a negative price shock
  • a decrease in inflation
  • all of the above
  • none of the above

• 6. If the natural rate of unemployment declines​ ________.
  • labor is more heavily utilized
  • potential output increases
  • the long run aggregate supply curve shifts to the right
  • all of the above
  • none of the above

• 7. The short-run Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a
  • given expected level of unemployment.
  • given rate of inflation.
  • given expected rate of inflation.
  • given level of unemployment

• 8. In the long run, following a combination of a negative demand shock and a temporary negative supply shock, ________.
  • both inflation and output return to the original long−run equilibrium values
  • inflation is permanently reduced, while output returns to potential output
  • output returns to potential output, while inflation may be higher or lower than its initial value
  • inflation is permanently increased, while output returns to potential output
  • none of the above

please answer all of these.

Answer 1

1) The correct option is ' households and businesses are reluctant to spend when prices rise'. Spending by households and businesses is inversely related with prices. Higher the prices, lower the spending and vice versa.

2) The correct option is 'less than 0.06.

Phillips curve equation is given by:

πt-π^e= - consant(Ut-Un).

3) The correct option is 'all of the above'. Rise in inflation erodes the purchasing power of consumers thus making every thing costly so consumers spend less. Rise in the nominal interest rate causes consumers to spend more in buying bonds rather than holding money which gives no interest at all.

4) The correct option is 'all of the above'. Price adjusts in the long run, thus any expansionary monetary policy doesn't affect real output. In the long run aggregate supply curve is fixed ie vertical at the potential level of output.

5) The correct option is the ' decrease in the nominal interest rate'. Fall in the interest rate boost both consumption and investment. Demand for money demands on interest rate and income. Lower interest rate encourage consumers to hold less bonds and demand more money. Thus consumption will increase. Lower interest rate reduces the cost of borrowing, thus investors will invest more. Overall aggregate demand in the economy will rise.

6) The correct option is 'all of the above'. Natural unemployment rate consists of structural and frictional unemployment rate. Fall in the natural unemployment rate means more are employed which pushes the range of output production ie potential output increases and thus Aggregate supply curve shifts rightwards.

7) The correct option is 'given expected rate of inflation'. The short run phillips curve shows the trade off between unemployment rate and inflation rate given the natural rate of unemployment and the expected inflation rate. If policy makers want to reduce inflation rate, it comes at the cost of higher unemployment rate.

8) The correct option is 'none of the above'. Because a negative shock to both demand and supply curve would lead to rise in the price level and quantity produced and demanded falls.