Describe how changes in expected inflation impact an economy in the wake of a temporary negative supply shock
What will be an ideal response?
The supply shock causes the short-run aggregate supply curve to shift up. The increase in inflation causes output to fall. Since higher-than-expected inflation is observed, expected inflation rises. At the same time, the negative output gap means there is less upward pressure on wages and prices. Moreover, the shock is now over and not expected to repeat. Thus, the second-round increase in inflation is smaller than expected, so expected inflation now adjusts downward, as observed inflation declines, until the output gap is eliminated.
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A central cause of the rising debt-GDP ratio in the United States during the 1980s and 1990s was
A) the tax cuts of the early 1980s. B) continuous increases in the military portion of the federal budget. C) overly-generous indexation of Social Security benefits. D) deficit-reduction targets.
The Pat Summerall School of Diction is employing teachers such that the marginal revenue product of teachers exceeds the wage rate. The school will
a. reduce its demand for teachers b. lay off teachers c. be losing money from those teachers employed d. hire more teachers e. increase the price of diction classes