Answers

Sample Questions from Chapter 9

1. Jones Chapter 9, Review Question 1.
The long- run model tells us about the trend, that is, what happens to the economy over a

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long time period, while the short-run model explains the relatively small fluctuations
around the trend.

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2. Jones Chapter 9, Review Question 2.

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One reason is that the size of the short-run output fluctuations tends to be constant in
percentage terms: positive output shocks are in the 3 percent range, not in, say, the $300

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billion range. In other words, expressing short-run output as a percent of potential output
allows for comparisons across time. A $100 billion fluctuation in short-run output in 2013
is (relatively) much smaller than the same fluctuation in output in 1965.

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3. Jones Chapter 9, Review Question 6.

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Okun’s law is handy because typical voters care about unemployment rates more than they
care about the GDP numbers. Our model focuses on short-run GDP, but we can speak to the

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person on the street by running our model through Okun’s law. Also, since unemployment
rates tend to fall a year or so after GDP starts to rise, one can use today’s GDP growth to
forecast changes in the unemployment rate over the next year.
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4. Jones Chapter 9, Exercise Question 3.

Please see worked exercise 3 in page 254 of the textbook.

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5. Jones Chapter 9, Exercise Question 4.

(a) In the steep (solid) economy, a boom
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causes a sharp rise in inflation, while a

bust causes a fast drop in inflation.
Changes in inflation happen more slowly
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in the flat (dashed) economy.

(b) The slope might be different because

people in the flat (dashed) economy
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aren’t used to seeing inflation change—

maybe inflation has been stable for
years, so they don’t think about it much.
Alternatively, government rules or
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strong monopoly or union power could

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make it difficult to change prices in the

dashed economy.
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(c) You can ignore this part. An interesting point to think about would be what happened to
Phillips curve in Bangladesh over time.
 It seems to be flatter than in the late 1970s (and early 1980s). A casual look at Figure 9.7 in
the textbook shows that the big outliers in that picture are in the upper- right and lower-
left corners. Those outliers tend to come from the 1970s and early 1980s. So if we redrew
the trend line but only used those outliers as data, we’d have a somewhat steeper line than
we see in Figure 9.7. It’s not a major difference, but perhaps the line grew latter in the past

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two decades as Americans grew used to low, stable inflation.

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6. Jones Chapter 9, Exercise Question 5.

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(a) The slope is +1/2. For each option, in year 1, for every two- percentage-point decrease
in Ỹ, the change in inflation is − 1 percentage point.

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(b) If I only care about the cumulative lost output, then I can’t decide between the three. In
all three cases, all three years of lost output add up to 6 percent. The real question is, Do I
want a quick sharp recession (option 1), or a slow draining one (option 3)? The
Reagan/Volcker recession was like option 1, and by the time reelection came three years

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later, people had almost forgotten about the recession. As a famous TV ad said, in 1984 it
was “Morning in America.” In 1991, by contrast, George H. W. Bush had a much milder

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recession that seemed to linger on until his reelection campaign, much like option 3, and he
lost. So this is a tough question, one where we can’t give a clearer answer without a clearer
understanding of what the politician wants.
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(c) Here, the answer seems clearer: if we care about low inflation, then we want option 1.
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That gets us to our goal quickly.
(d) The only way to lower inflation (a good thing, usually) is to create a recession (a bad
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thing, almost always).

7. Jones Chapter 9, Exercise Question 8.

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(a) 5.5 percent, 6 percent, 6.5 percent, and 7 percent, respectively.

(b) 0 percent, −2 percent, and 4 percent, respectively.

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