Question 1

Proponents of rational expectations theory argue that when government policies change, people adjust their expectations accordingly, and that failure to include that fact once led to estimates of the sacrifice ratio that were unreliable guides to policy.

Accepted Answer

Proponents of rational expectations theory do argue that people adjust their expectations based on changes in government policies, and this has led to revised estimates of the sacrifice ratio that are considered more reliable.

Question 2

If the sacrifice ratio is five, it means that for each percentage point that inflation is reduce, one per cent of annual output must be sacrificed in the transition.

Accepted Answer

The sacrifice ratio of five means that for each percentage point reduction in inflation, five percent of annual output must be sacrificed in the transition.

Question 3

Phillips said that a central bank cannot use its control over nominal quantities to peg a real quantity - the real rate of interest, the rate of unemployment, the level of real national income, the real quantity of money, the rate of growth of real national income, or the rate of growth of the real quantity of money.

Accepted Answer

False

Question 4

Contractionary monetary policy contracts aggregate demand, reduces employment and inflation, and eventually reduces expected inflation, causing the short-run Phillips curve to shift downwards.

Accepted Answer

Contractionary monetary policy aims to decrease inflation and control economic growth by decreasing the money supply, which decreases aggregate demand and eventually leads to reduced employment and inflation. This, in turn, reduces expected inflation and causes a downward shift of the short-run Phillips curve.

Question 5

If decreases in money supply or cuts in government contract aggregate demand, they can lower inflation in the short run, but only at the expense of higher unemployment.

Accepted Answer

Decreases in money supply or cuts in government contracts can lower aggregate demand, which can lead to lower inflation in the short run. However, this decrease in demand also means less spending, less production, and ultimately, job losses. This can lead to higher unemployment in the short term.

Question 6

The Phillips curve implies that the economy faces a:

Accepted Answer

The Phillips curve represents a short-run trade-off between inflation and unemployment. It suggests that when unemployment is low, inflation tends to be high, and when unemployment is high, inflation tends to be low. However, this trade-off is only applicable in the short run, as in the long run, any reduction in unemployment results in an increase in inflation without changing output or wages. Therefore, there is no long-run trade-off between inflation and unemployment.

Question 7

NAIRU (non-accelerating inflation rate of unemployment) refers to the level of unemployment that does not result in increases in the inflation rate.

Accepted Answer

NAIRU refers to the level of unemployment at which the economy is producing at its potential and there is no upward pressure on the inflation rate. This level varies over time and across countries, but it generally ranges between 4% and 6% in developed economies.

Question 8

According to the textbook, the sacrifice ratio should be ignored when attempting to reduce inflation beyond acceptable targets as continued inflation has dire consequences.

Accepted Answer

The sacrifice ratio is an important consideration when attempting to reduce inflation because it measures the cost, in terms of lost output, of reducing inflation by a certain amount. Ignoring it could lead to underestimating the economic impact of anti-inflation policies.

Question 9

When the money supply changes, the aggregate-demand curve shifts and the economy moves along a given short-run aggregate-supply curve, causing unexpected changes in output, prices, unemployment and inflation.These changes cause people to adjust their expectations of inflation, leading to shifts in the short-run aggregate-supply curve.

Accepted Answer

This is a correct statement about the relationship between changes in the money supply, shifts in the aggregate-demand curve, and adjustments in expectations that can lead to shifts in the short-run aggregate-supply curve.

Question 10

The Phillips curve simply shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate- demand curve move the economy along the short-run aggregate-supply curve.

Accepted Answer

This is a correct definition of the Phillips curve. It shows the inverse relationship between inflation and unemployment in the short run as shifts in aggregate demand cause movements along the short-run aggregate supply curve.

Question 11

Rational expectations theory is based on the assumption that people optimally allocate their incomes - that is, they decide how much they consume and how much they save.

Accepted Answer

Rational expectations theory primarily focuses on how people form expectations about the future and make decisions based on those expectations, rather than on how they optimally allocate their incomes between consumption and saving.

Question 12

Okun's law tells us that greater output means a lower rate of unemployment.Thus, an increase in aggregate demand moves the economy along the Phillips curve to a point with lower unemployment and higher inflation.

Accepted Answer

Okun's law states that there is an inverse relationship between output and unemployment. Thus, if output increases, unemployment decreases. Furthermore, the Phillips curve shows the trade-off between inflation and unemployment, and an increase in aggregate demand can shift the economy along the curve to a point with lower unemployment and higher inflation.

Question 13

A typical estimate of the sacrifice ratio is five.According to Sargent, the sacrifice ratio could be much smaller than suggested by previous estimates.

Accepted Answer

Sargent suggests that the sacrifice ratio could be much smaller than typical estimates, indicating that the statement is true.

Question 14

Samuelson and Solow reasoned that the trade-off between inflation and unemployment arose because low unemployment was associated with high aggregate demand, and because high demand puts upward pressure on wages and prices throughout the economy.

Accepted Answer

Samuelson and Solow's reasoning was that there was a trade-off between inflation and unemployment because low unemployment was associated with high aggregate demand, which puts upward pressure on wages and prices throughout the economy.

Question 15

The natural rate hypothesis states that if policymakers choose higher inflation in order to reduce unemployment below the natural rate, they will succeed at reducing unemployment permanently.

Accepted Answer

The natural rate hypothesis posits that there is a certain level of unemployment that the economy will tend towards in the long run, regardless of the level of inflation. If policymakers try to reduce unemployment below this natural rate by increasing inflation, the benefits will be temporary and eventually lead to even higher inflation without reducing unemployment. Therefore, choosing higher inflation to reduce unemployment permanently is not a viable option according to the natural rate hypothesis.

Question 16

According to rational expectations theory, a credible commitment to low inflation increases the cost of disinflation, because people are rational.

Accepted Answer

According to rational expectations theory, a credible commitment to low inflation actually decreases the cost of disinflation because people anticipate lower inflation in the future and adjust their behavior accordingly, reducing the economic disruptions caused by the disinflation process.

Question 17

Phillips's discovery in the UK was supported by a similar negative correlation between inflation and unemployment in data for the United States.

Accepted Answer

The statement accurately describes the evidence found in data for the United States, supporting Phillips's original discovery in the UK.

Question 18

According to Friedman and Phelps, which of the following does not influence the economy's unemployment rate in the long run?

Accepted Answer

Friedman and Phelps both believe that in the long run, monetary growth does not have a significant influence on the rate of unemployment. Instead, they argue that factors such as the market power of unions and the role of efficiency wages have a greater impact on long-term unemployment rates.

Question 19

The Phillips curve is the short-run relationship between inflation and unemployment.

Accepted Answer

The Phillips curve posits that there is an inverse relationship between inflation and unemployment in the short run - when one goes up, the other tends to go down.

Question 20

Friedman and Phelps concluded that there is no reason to think the rate of inflation would, in the long run, be related to the rate of unemployment.

Accepted Answer

The answer of Friedman and Phelps concluded that there is...

Quiz 35: The Short-Run Trade-Off Between Inflation and Unemployment