Question 1

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should _____ aggregate demand at a cost of generating _____ inflation.
A)increase; higher
B)increase; lower
C)decrease; higher
D)decrease; lower

Accepted Answer

According to the short-run Phillips curve, there is an inverse relationship between unemployment and inflation in the short run. Therefore, to reduce unemployment in the short run, policymakers should increase aggregate demand. However, this may lead to higher inflation in the short run as firms may respond to increased demand by raising prices. Thus, policymakers have to accept the tradeoff between higher inflation and lower unemployment in the short run. Choice A is the correct answer as it reflects this tradeoff.

Question 2

Exhibit: Short-Run Phillips Curve  As the short-run Phillips curve shifts from A to B to C to D:
A)the expected rate of inflation is unchanged at every level of unemployment.
B)there is a lower-than-expected rate of inflation at every level of unemployment.
C)there is a higher-than-expected rate of inflation for every level of unemployment.
D)the natural rate of unemployment increases.

Accepted Answer

The answer of Exhibit: Short-Run Phillips Curve  As the...

Question 3

The endogenous variables of "A Big, Comprehensive Model" in the appendix to Chapter 14 include the level of output, the natural rate of output, the price level, and:
A)the real and nominal interest rates.
B)the money supply.
C)the world price level.
D)government purchases.

Accepted Answer

The endogenous variables in a comprehensive economic model typically include variables that are determined within the model, such as the real and nominal interest rates, which are influenced by other factors like output and price levels.

Question 4

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:
A)increase.
B)decrease.
C)remain unchanged.
D)be zero.

Accepted Answer

If hysteresis is correct and output is lost even after a period of disinflation, then the sacrifice ratio (the amount of output lost during a disinflationary period) will increase. This is because the economy will have to go through a longer period of economic pain before output returns to its previous level.

Question 5

Each of the following conditions will tend to reduce the sacrifice ratio except when:
A)workers and firms set wages and prices based on rational expectations.
B)policymakers make credible commitments to policy changes.
C)announcements of policy changes are made before workers and firms have formed expectations.
D)the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.

Accepted Answer

The sacrifice ratio is a measure of the cost of reducing inflation in terms of lost output or unemployment. Conditions A, B, and C can all help to reduce the sacrifice ratio by making inflation expectations more accurate or policy changes more credible, thus reducing the economic costs of lowering inflation. However, D, the concept of hysteresis, suggests that past high unemployment can increase the natural rate of unemployment, potentially making it more costly (in terms of output or employment) to reduce inflation, thus not reducing the sacrifice ratio.

Question 6

According to the natural-rate hypothesis, output will be at the natural rate:
A)if inflation exceeds expected inflation.
B)if inflation falls below expected inflation.
C)if inflation meets expectations in the short run.
D)if aggregate demand affects output in the long run.

Accepted Answer

According to the natural-rate hypothesis, output will be at the natural rate when inflation meets expectations in the short run, as this implies that there are no unexpected changes in inflation affecting output.

Question 7

All of the following are requirements for reducing inflation without causing a recession except:
A)workers and firms must form expectations rationally.
B)the plan must be announced before expectations are formed.
C)the plan must be believed by workers and firms.
D)the government's budget must be balanced.

Accepted Answer

While a balanced government budget can be beneficial for reducing inflation, it is not a necessary requirement for achieving this goal without causing a recession. The other options (rational expectations, announcing the plan before expectations are formed, and belief in the plan by workers and firms) are crucial for successfully reducing inflation without causing a recession.

Question 8

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:
A)Okun's law.
B)the Phillips curve.
C)the natural-rate hypothesis.
D)hysteresis.

Accepted Answer

Hysteresis refers to the phenomenon where the natural rate of unemployment increases after prolonged periods of high unemployment, as skills deteriorate and workers become less employable.

Question 9

According to the natural-rate hypothesis, the levels of output and unemployment depend on:
A)aggregate demand in the short run but not in the long run.
B)aggregate demand in the long run but not in the short run.
C)the natural rate of unemployment in the short run but the natural rate of inflation in the long run.
D)the natural rate of inflation in the short run but the natural rate of unemployment in the long run.

Accepted Answer

The natural-rate hypothesis posits that in the short run, output and unemployment levels can be influenced by aggregate demand due to price and wage stickiness. However, in the long run, the economy tends to return to levels of output and unemployment that are determined by supply-side factors, such as technology and labor market institutions, rather than by aggregate demand. This is because prices and wages adjust over time to reflect changes in demand, bringing the economy back to its natural rates of output and unemployment.

Question 10

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy _____ percent of one year's GDP.
A)4
B)5
C)20
D)40

Accepted Answer

The sacrifice ratio is the percentage of GDP that must be foregone to reduce inflation by 1 percentage point. Therefore, if the central bank wishes to reduce inflation from 10 percent to 5 percent, it will have to sacrifice 5 percentage points. Since the sacrifice ratio is 4, this means that the economy will have to forego 5 x 4 = 20 percent of one year's GDP. Therefore, the answer is (C) 20.

Question 11

The sacrifice ratio measures the:
A)number of percentage points of the money supply that must be reduced to reduce inflation by 1 percentage point.
B)extra taxes that must be paid to balance the budget.
C)number of months of real gross domestic product (GDP) that must be forgone to reduce the inflation rate by 1 percentage point.
D)percentage of a year's real gross domestic product (GDP) that must be forgone to reduce inflation by 1 percentage point.

Accepted Answer

The sacrifice ratio refers to the percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point.

Question 12

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:
A)both the short run and the long run.
B)only in the short run.
C)only in the long run.
D)in neither the short run nor the long run.

Accepted Answer

The natural-rate hypothesis suggests that in the long run, output returns to its potential level determined by factors such as technological progress and labor force growth. In the short run, however, fluctuations in aggregate demand can cause deviations from potential output. Therefore, fluctuations in aggregate demand affect output only in the short run, not in the long run.

Question 13

The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the:
A)NAIRU.
B)short-run Phillips curve.
C)sacrifice ratio.
D)Okun's law.

Accepted Answer

The sacrifice ratio measures the cost in terms of lost output (real GDP) to reduce inflation by 1 percentage point.

Question 14

Exhibit: Short-Run Phillips Curve  As the short-run Phillips curve shifts from A to B to C to D, policymakers face:
A)the same tradeoff between inflation and unemployment.
B)a lower rate of inflation for any level of unemployment.
C)a higher rate of inflation for any level of unemployment.
D)higher than expected inflation rates and lower unemployment rates.

Accepted Answer

The answer of Exhibit: Short-Run Phillips Curve  As the...

Question 15

All of the following are exogenous variables in "A Big, Comprehensive Model" in the appendix to Chapter 14 except the:
A)world interest rate.
B)labour force.
C)world real interest rate.
D)price level.

Accepted Answer

The price level is typically considered an endogenous variable within economic models, as it is determined by the interactions within the model rather than being imposed from outside.

Question 16

The estimate of the sacrifice ratio from the 1980s disinflation in Canada is approximately:
A)5-6.
B)3-4.
C)1-1.5.
D)0-0.5.

Accepted Answer

The answer of The estimate of the sacrifice ratio from...

Question 17

The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:
A)the history of economic thought is important to macroeconomics.
B)workers get hysterical during long depressions.
C)hysteresis lowers the sacrifice ratio.
D)the natural rate of unemployment may increase if unemployment is high for a long period of time.

Accepted Answer

The hypothesis that hysteresis may play an important role in macroeconomics implies that the natural rate of unemployment may increase if unemployment is high for a long period of time. This is because hysteresis suggests that long-term periods of economic weakness can cause permanent damage to the economy, leading to a higher natural rate of unemployment. Option A is incorrect as the history of economic thought may be important in general, but it is not directly related to the idea of hysteresis. Option B is incorrect as it is not a serious or relevant explanation of hysteresis. Option C may be true, but it is not a necessary implication of the hypothesis.

Question 18

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:
A)changing an unemployed individual's attitude toward work.
B)reducing an unemployed worker's job skills.
C)permanently reducing the money supply.
D)altering the wage-setting process.

Accepted Answer

A recession may affect the natural rate of unemployment by altering an unemployed individual's attitude toward work (A), reducing an unemployed worker's job skills (B), or altering the wage-setting process (D). However, a recession does not have a direct impact on the money supply, which is determined by monetary policy decisions made by the central bank. Therefore, choice C (permanently reducing the money supply) is incorrect.

Question 19

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:
A)5.
B)2.8.
C)1.
D)0.

Accepted Answer

If people quickly adjust their expectations due to credible policy commitments, the economy can reduce inflation without a significant loss in output, leading to a sacrifice ratio of approximately 0.

Question 20

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will result in a loss of output that is _____ than expected based on the sacrifice ratio.
A)larger
B)smaller
C)the same
D)sometimes larger and sometimes slower

Accepted Answer

A credible policy to lower inflation can lead to smaller output loss than expected because rational agents adjust their expectations quickly, reducing the need for prolonged economic adjustments.

Quiz 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should _ aggregate demand at a cost of generating _ inflation.

Exhibit: Short-Run Phillips Curve As the short-run Phillips curve shifts from A to B to C to D:

The endogenous variables of "A Big, Comprehensive Model" in the appendix to Chapter 14 include the level of output, the natural rate of output, the price level, and:

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

Each of the following conditions will tend to reduce the sacrifice ratio except when:

According to the natural-rate hypothesis, output will be at the natural rate:

All of the following are requirements for reducing inflation without causing a recession except:

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:

According to the natural-rate hypothesis, the levels of output and unemployment depend on:

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy _____ percent of one year's GDP.

The sacrifice ratio measures the:

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:

The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the:

Exhibit: Short-Run Phillips Curve As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

All of the following are exogenous variables in "A Big, Comprehensive Model" in the appendix to Chapter 14 except the:

The estimate of the sacrifice ratio from the 1980s disinflation in Canada is approximately:

The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will result in a loss of output that is _____ than expected based on the sacrifice ratio.