Question 1

Which equation represents the IS curve in the IS-LM-PC model, describing output in the short run as determined by demand?

Accepted Answer

$$Y = C(Y - T) + I(Y, r) + G$$

Question 2

In the IS-LM-PC model, what does the PC curve (Phillips Curve) describe?

Accepted Answer

The relationship between inflation and unemployment

Question 3

According to Okun's Law, what is the approximate relationship between the change in unemployment rate and the growth rate of output?

Accepted Answer

$$u - u_{-1} = -\beta g_Y$$

Question 4

If the annual output growth rate is less than 3%, what is likely to happen to the unemployment rate according to Okun's Law?

Accepted Answer

The unemployment rate will rise

Question 5

What is the Okun coefficient, and what does it represent?

Accepted Answer

The slope relating changes in unemployment to output growth

Question 6

Given the Phillips Curve equation $$\pi = \pi^e + \alpha (Y - Y^*)$$, what happens to inflation when output is above potential?

Accepted Answer

Inflation increases

Question 7

What is the natural rate of interest, also known as the Wicksellian rate, in the IS-LM-PC model?

Accepted Answer

The real interest rate at which output equals potential and inflation is stable

Question 8

In the medium run, what is the effect of monetary policy on real variables according to the IS-LM-PC model?

Accepted Answer

Monetary policy does not affect real variables

Question 9

What is meant by the 'neutrality of money' in the context of the IS-LM-PC model?

Accepted Answer

Monetary policy does not affect real variables in the medium run

Question 10

If the central bank wants to keep inflation constant, what must happen to output according to the IS-LM-PC model?

Accepted Answer

Output must converge to potential output

Question 11

Suppose wage setters expect inflation this year to be the same as last year. According to the Phillips Curve, what is the likely outcome if output is above potential?

Accepted Answer

Actual inflation will exceed expected inflation

Question 12

Which equation describes the output gap in terms of unemployment and labor force?

Accepted Answer

$$Y - Y^* = L(u_n - u)$$

Question 13

If the central bank sets the real interest rate below the natural rate, what is the likely effect on output and inflation in the short run?

Accepted Answer

Output rises above potential and inflation increases

Question 14

What is the main message of the IS-LM-PC model regarding the adjustment from the short run to the medium run?

Accepted Answer

With the help of policy, output returns to potential in the medium run

Question 15

Which of the following best describes the dynamic effects of fiscal consolidation in the IS-LM-PC model?

Accepted Answer

Fiscal consolidation may reduce output in the short run but output returns to potential in the medium run

Question 16

If the regression line for Okun's Law is $$u - u_{-1} = -0.4(g_Y - 3	ext{%})$$, what does the value 0.4 represent?

Accepted Answer

The Okun coefficient

Question 17

What is the implication of the IS-LM-PC model for policy makers aiming to stabilize inflation?

Accepted Answer

They must ensure output is at potential in the medium run

Question 18

Which variable is determined by monetary policy in the medium run according to the IS-LM-PC model?

Accepted Answer

The rate of inflation

Question 19

What does the IS-LM-PC model suggest about the adjustment of inflation when output is below potential?

Accepted Answer

Inflation decreases

From the Short to the Medium Run: The IS-LM-PC Model (Chapter 9 Study Notes)

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