Question 1

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 described is the sacrifice ratio, which is the amount of output that must be sacrificed in terms of lost GDP in order to reduce inflation by one percentage point.

Question 2

"Demand inflation" refers to

Accepted Answer

Demand inflation refers to the inflation that results from any inflationary gap caused by a rightward shift of the AD curve. It occurs when the aggregate demand in an economy increases faster than the economy's capacity to produce goods and services, leading to upward pressure on prices. This can happen due to factors such as increased consumer spending, government spending, or exports. It is called demand inflation as it is caused by excess demand in the economy.

Question 3

Increases in money wages in the economy are generally the effect of which force(s)?

Accepted Answer

Increases in money wages are typically influenced by the output gap effect, where wages rise due to increased demand for labor, and the expectational effect, where anticipated inflation leads workers to demand higher wages.

Question 4

Suppose the actual rate of inflation in the economy is 5 percent. If we know that expected inflation is 2 percent, and that output- gap inflation is 1 percent, then we also know that

Accepted Answer

Non-wage supply-shock inflation can be calculated by subtracting expected inflation and output-gap inflation from the actual inflation rate: 5% - 2% - 1% = 2%.

Question 5

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6 percent. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by

Accepted Answer

In order to maintain the same purchasing power, your nominal salary must increase by the same percentage as the expected inflation rate. Therefore, your employer would have to agree to change your nominal salary by 6 percent to keep your real salary constant.

Question 6

"Supply inflation" refers to

Accepted Answer

"Supply inflation" specifically refers to inflation that arises from a leftward shift of the AS curve, indicating a decrease in the potential output of the economy. This type of inflation is not caused by excess demand for factors of production, but rather by factors such as supply shocks, natural disasters, or government intervention.

Question 7

The acceleration hypothesis states that

Accepted Answer

The acceleration hypothesis suggests that if an inflationary gap is maintained by the central bank, inflation will accelerate due to increasing demand pressures and expectations.

Question 8

Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is

Accepted Answer

The answer of Average wages in Canada have increased each...

Question 9

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil and no change in Canadian aggregate supply. The short- term effect on the Canadian price level would be called

Accepted Answer

An increase in world oil prices would lead to an increase in demand for Canadian exports of oil, which would lead to an increase in aggregate demand. Since there is no change in Canadian aggregate supply, the result would be an increase in prices, or demand inflation.

Question 10

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

Accepted Answer

Changing people's expectations of future inflation is essential to successfully end a sustained inflation. If people come to expect that prices will continue to rise, they may demand higher wages or businesses may try to increase their prices, fueling further inflation. By changing expectations, the central bank can break this cycle and pave the way for lower inflation. Choices A, B, and D are not necessarily achievable or desirable in all cases, and maintaining a constant sacrifice ratio (the short-run cost of reducing inflation) may not be feasible or necessary in all circumstances.

Question 11

Other things being equal, unit costs will rise and the AS curve will shift upward if

Accepted Answer

The answer of Other things being equal, unit costs will...

Question 12

The reason why inflation can persist even after its original causes have been removed is that

Accepted Answer

Inflationary expectations cause AS (aggregate supply) to continue shifting upwards, as workers and firms adjust their price and wage-setting behavior based on their expectations of future inflation. This means that even if the original causes of inflation, such as excess demand or supply-side shocks, are eliminated, inflation may still persist if these expectations persist. This is why managing expectations is an important part of controlling inflation.

Question 13

Isolated negative aggregate supply shocks, in the absence of monetary validation, will

Accepted Answer

Isolated negative aggregate supply shocks can eventually be self-correcting as wages slowly fall. As wages and prices adjust downward, the short-run aggregate supply curve shifts to the right, eventually returning the economy to potential output level. However, this process can be slow and painful, and government policy to expand the money supply can speed up the adjustment process.

Question 14

A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations

Accepted Answer

Inflationary expectations can lead to higher wages and prices, causing the Aggregate Supply (AS) curve to shift upward, making it difficult to eliminate sustained inflation.

Question 15

If the central bank uses monetary policy to attempt to hold Y permanently above Y^*,

Accepted Answer

Inflation will accelerate over time because the central bank is trying to hold Y permanently above Y*, which will lead to an increase in aggregate demand. This will cause the price level to rise, which will lead to inflation.

Question 16

The idea that, in the long run, the Phillips curve is vertical, implying no trade- off between inflation and unemployment, is based on the premise that

Accepted Answer

In the long run, inflationary expectations fully adjust to actual inflation, meaning that any attempt to reduce unemployment below its natural rate will only lead to higher inflation without affecting unemployment, resulting in a vertical Phillips curve.

Question 17

Which of the following will lead to sustained inflation?

Accepted Answer

Persistent expectations of continued inflation can create a self-fulfilling prophecy where firms and individuals adjust their behavior to accommodate expected inflation, leading to sustained inflation. The other options may cause temporary price increases, but are unlikely to lead to sustained inflation.

Question 18

Beginning from a position of long- run equilibrium, an expansionary monetary policy by the Bank of Canada causes:

Accepted Answer

Expansionary monetary policy by the Bank of Canada increases the money supply and lowers interest rates, leading to an increase in spending and aggregate demand. This leads to a situation where aggregate demand for goods and services exceeds potential output, causing inflationary pressures.

Question 19

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

Accepted Answer

The answer of Of the three phases involved in the...

Question 20

For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be considered

Accepted Answer

An increase in the world price of oil would lead to an increase in demand for oil exports from Alberta, and therefore a positive demand shock. This would boost the economy of Alberta as it would generate more revenue from oil exports.

Quiz 30: Inflation and Disinflation

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

"Demand inflation" refers to

Increases in money wages in the economy are generally the effect of which force(s) ?

Suppose the actual rate of inflation in the economy is 5 percent. If we know that expected inflation is 2 percent, and that output- gap inflation is 1 percent, then we also know that

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6 percent. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by

"Supply inflation" refers to

The acceleration hypothesis states that

Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil and no change in Canadian aggregate supply. The short- term effect on the Canadian price level would be called

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

Other things being equal, unit costs will rise and the AS curve will shift upward if

The reason why inflation can persist even after its original causes have been removed is that

Isolated negative aggregate supply shocks, in the absence of monetary validation, will

A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations

If the central bank uses monetary policy to attempt to hold Y permanently above Y^*,

The idea that, in the long run, the Phillips curve is vertical, implying no trade- off between inflation and unemployment, is based on the premise that

Which of the following will lead to sustained inflation?

Beginning from a position of long- run equilibrium, an expansionary monetary policy by the Bank of Canada causes:

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

For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be considered

Quiz 30: Inflation and Disinflation

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

"Demand inflation" refers to

Increases in money wages in the economy are generally the effect of which force(s) ?

Suppose the actual rate of inflation in the economy is 5 percent. If we know that expected inflation is 2 percent, and that output- gap inflation is 1 percent, then we also know that

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6 percent. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by

"Supply inflation" refers to

The acceleration hypothesis states that

Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil and no change in Canadian aggregate supply. The short- term effect on the Canadian price level would be called

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

Other things being equal, unit costs will rise and the AS curve will shift upward if

The reason why inflation can persist even after its original causes have been removed is that

Isolated negative aggregate supply shocks, in the absence of monetary validation, will

A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations

If the central bank uses monetary policy to attempt to hold Y permanently above Y*,

The idea that, in the long run, the Phillips curve is vertical, implying no trade- off between inflation and unemployment, is based on the premise that

Which of the following will lead to sustained inflation?

Beginning from a position of long- run equilibrium, an expansionary monetary policy by the Bank of Canada causes:

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

For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be considered

If the central bank uses monetary policy to attempt to hold Y permanently above Y^*,