Question 1

Suppose policymakers are faced with ending a sustained inflation.They must weigh the future benefits of against the immediate costs of .

Accepted Answer

The correct answer is D because ending sustained inflation typically involves tightening monetary policy, which can lead to reduced output and higher unemployment in the short term. However, the future benefit of such a policy is lower inflation, which can stabilize the economy and support sustainable growth.

Question 2

Suppose the current inflation rate is 4% and the Bank of Canada wants to reduce it to 2%,knowing that the sacrifice ratio is 2.Apparently,the Bank of Canada is prepared to accept a decline of real GDP of ________ as the cost of disinflation.

Accepted Answer

The answer of Suppose the current inflation rate is 4%...

Question 3

The sacrifice ratio is a measure of the

Accepted Answer

The sacrifice ratio is a measure of the cumulative loss in real GDP due to a disinflation. It reflects the trade-off between reducing inflation and the cost in terms of output forgone. It is calculated as the percentage reduction in output required to achieve a given percentage point reduction in inflation.

Question 4

Consider an economy that is in the process of a disinflation.Suppose that over a 2 -year period,the rate of inflation is reduced from 6% to 1%.Over this same time,the cumulative loss in real GDP is $30 billion.Potential GDP is $600 billion.What is the sacrifice ratio?

Accepted Answer

The answer of Consider an economy that is in the...

Question 5

If a central bank is to successfully end a sustained inflation,it is essential that it

Accepted Answer

In order to end sustained inflation, it is necessary to change people's expectations of future inflation. This means convincing them that the central bank is committed to low inflation in the long run, even if short-term measures may cause some discomfort, such as temporarily increased unemployment or reduced national income. Using a "cold-turkey" approach (B) may cause too much economic upheaval, while avoiding any increase in unemployment (E) or loss in national income (A) may not be feasible without some short-term sacrifices. The sacrifice ratio (D), which measures the amount of output lost for each percentage point reduction in inflation, is a useful indicator of the costs of fighting inflation, but is not in itself an essential component of successfully ending inflation.

Question 6

Of the three phases involved in the elimination of a sustained inflation in Canada,the second phase is characterized by

Accepted Answer

In the second phase of eliminating sustained inflation, the economy often experiences stagflation, characterized by falling output and continuing inflation. This occurs as tighter monetary policies begin to slow economic activity, but prices remain high or continue to rise due to previous inflationary pressures.

Question 7

Suppose we know the following information about a hypothetical economy: -real GDP = $485 billion
-potential GDP = $500 billion
-inflation rate = 4%
-target overnight interest rate = 6%
If the central bank implements a contractionary monetary policy in an effort to reduce the inflation rate,the short-run effect of this policy is likely to be that

Accepted Answer

DA contractionary monetary policy typically involves increasing interest rates to reduce inflation. This makes borrowing more expensive, which can reduce spending and investment, leading to lower economic activity. In the short run, this can increase unemployment as businesses adjust to the decreased demand. Therefore, unemployment is likely to rise further beyond the natural rate of unemployment (NAIRU), making option A correct. Additionally, while the policy aims to reduce inflation, the immediate effect of higher interest rates is not to lower them but to control inflationary pressures. However, the explanation directly aligns with option A's outcome of rising unemployment due to reduced economic activity. Option D incorrectly suggests both the interest rate and inflation rate will fall, which contradicts the immediate effect of a contractionary policy to raise interest rates to combat inflation.

Question 8

In general,the sacrifice ratio will be greater,the

Accepted Answer

The sacrifice ratio is the cost of reducing inflation by 1% and it is influenced by how quickly inflation expectations adjust to the new policy regime. When it takes longer to revise inflationary expectations downwards, the sacrifice ratio will be greater. This means that in order to reduce inflation by 1%, there will be a higher cost in terms of output and employment. Therefore, the correct answer is D) longer it takes to revise inflationary expectations downwards.

Question 9

In general,the sacrifice ratio will be smaller,the

Accepted Answer

The sacrifice ratio refers to the amount of output that must be forgone in order to bring down inflation by a given amount. If inflationary expectations can be revised downwards more quickly, then the sacrifice ratio will be smaller because the central bank will not have to tighten monetary policy as much to bring down inflation expectations. This is reflected in choice A.

Question 10

Consider an economy that is in the process of a disinflation.If the sacrifice ratio is 3,then

Accepted Answer

The sacrifice ratio is a measure of the cost of reducing inflation in terms of lost output or GDP. A sacrifice ratio of 3 means it costs 3% of GDP to reduce inflation by 1 percentage point.

Question 11

A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the

Accepted Answer

The measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the sacrifice ratio. It is a ratio of the cumulative loss of output due to policy actions aimed at reducing inflation to the reduction in inflation achieved by those actions.

Question 12

The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the

Accepted Answer

When the Bank of Canada attempts to remove sustained inflation, it will typically raise interest rates, which will reduce aggregate demand (AD) and shift the AD curve to the left. However, if there are already inflationary expectations in the economy, then firms may anticipate higher costs of production and raise prices in order to maintain profit margins. This will cause the aggregate supply (AS) curve to shift upward, resulting in higher prices and lower output, which is the definition of stagflation. Therefore, the correct answer is D, as the AS curve continues shifting upward.

Question 13

One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that

Accepted Answer

The restrictive monetary policy adopted by the Bank of Canada in the early 1980s led to a dramatic fall in inflation, but it was accompanied by a major recession. This was due to the high interest rates which led to reduced investment and demand in the economy. The policy was successful in bringing down inflation in the long run, but at the cost of short-term pain in the form of a recession.

Question 14

The sacrifice ratio reflects the cost of ________ as measured by the ________.

Accepted Answer

The sacrifice ratio refers to the cost of reducing inflation by one percentage point and is measured by the loss in economic activity, or output, that results from the disinflationary policy.

Question 15

Consider the process of disinflation.Typical estimates for the sacrifice ratio for many developed economies suggest that reducing inflation by 1 percentage point ʺcostsʺ the economy between  ________% of real GDP.

Accepted Answer

The sacrifice ratio for many developed economies is estimated to be between 2 and 4 percent of real GDP. This means that reducing inflation by 1 percentage point will cost the economy between 2 and 4 percent of its GDP.

Question 16

Of the three phases of a disinflation,the first phase consists of the central bank

Accepted Answer

The first phase of disinflation involves the central bank slowing down the rate of monetary expansion to reduce inflationary pressures.

Question 17

The sacrifice ratio is calculated by

Accepted Answer

The sacrifice ratio is the cumulative loss of output that results from reducing inflation by 1 percentage point. It is calculated by dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell. Therefore, option C is the correct answer. The other options are not related to the calculation of the sacrifice ratio.

Question 18

The process of disinflation can involve some period of increased inflation and reduced output.Economists refer to this as

Accepted Answer

The answer of The process of disinflation can involve some...

Quiz 29: Inflation and Disinflation