Question 1

Ultimately, the change in unemployment associated with a change in inflation is due to

Accepted Answer

The answer of Ultimately, the change in unemployment associated with...

Question 2

If people believe that the central bank is going to reduce inflation

Accepted Answer

If people believe that the central bank is going to reduce inflation, they will anticipate lower inflation rates in the future, which will decrease inflation expectations, lower nominal wages, and reduce the cost of production. As a result, the short-run Phillips curve shifts left, with lower inflation rates for a given level of unemployment. Moreover, the sacrifice ratio will fall, as the reduction in inflation rates requires lower costs, shorter periods of unemployment, and lower costs of adjusting to lower inflation expectations.

Question 3

The sacrifice ratio is the

Accepted Answer

The sacrifice ratio is the number of percentage points annual output falls for each percentage point reduction in inflation. It is not related to the inflation and unemployment rates or the ratio of the two. It also does not measure the impact on unemployment, so option D is incorrect.

Question 4

Suppose a central bank announced that it was going to make a serious effort to fight inflation. A few years later the inflation rate is lower, but there had been a serious recession. We could conclude with certainty that

Accepted Answer

While it is true that the central bank's efforts to fight inflation may have contributed to the recession, it is impossible to conclude with certainty that the rational expectations hypothesis is either true or false, or that the policymakers lacked credibility. Many factors may have contributed to the outcome, including external shocks, changes in government policies, and broader economic conditions. Therefore, none of the statements presented in the answer choices can be regarded as certain under the given circumstances.

Question 5

In 1979, Fed Chair Paul Volcker

Accepted Answer

In 1979, Fed Chair Paul Volcker believed that decreasing inflation would temporarily decrease output growth, which led him to institute a contractionary monetary policy to combat inflation. Therefore, choices A and B are incorrect.

Question 6

In the late 1970s, proponents of rational expectations argued that

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The answer of In the late 1970s, proponents of rational...

Question 7

If the sacrifice ratio is 2, reducing the inflation rate from 4 percent to 2 percent would

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The answer of If the sacrifice ratio is 2, reducing...

Question 8

A country is likely to have a higher sacrifice ratio if

Accepted Answer

The sacrifice ratio refers to the economic cost of reducing inflation. If contracts are longer and people believe the central bank will not reduce inflation, they will expect high inflation rates in the future and build that expectation into their contracts. As a result, reducing inflation will require a significant economic sacrifice, hence a higher sacrifice ratio.

Question 9

If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift

Accepted Answer

If people believed the Fed's policy to reduce inflation, they would expect lower inflation in the future, which would shift the short-run Phillips curve left. This means that for any given unemployment rate, there would be lower inflation. The sacrifice ratio, which is the cost of reducing inflation, would also fall because the shift in the Phillips curve would mean that the Fed could achieve lower inflation with less output loss.

Question 10

The Volcker disinflation

Accepted Answer

The Volcker disinflation caused output to fall, but by less than the typical estimate of the sacrifice ratio suggested. This is because the Federal Reserve's credibility in fighting inflation led to lower inflation expectations, which allowed for a less severe reduction in output than anticipated.

Question 11

The theory by which people optimally use all available information when forecasting the future is known as

Accepted Answer

The theory of rational expectations suggests that individuals use all available information, including past experiences and current economic conditions, to make the most accurate forecast of the future. This theory assumes that individuals are rational and have access to all necessary information, resulting in their expectations being unbiased and efficient.

Question 12

Which of the following would tend to shorten recessions associated with anti-inflation policies by central banks?

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The answer of Which of the following would tend to...

Question 13

Contractionary monetary policy

Accepted Answer

Contractionary monetary policy typically increases interest rates and reduces the money supply, which can lead to lower inflation rates, or disinflation. This policy can also make the short-run Phillips curve shift left, as it represents a trade-off between inflation and unemployment, indicating that lower inflation (disinflation) may come at the cost of higher unemployment in the short run.

Question 14

Which of the following claims concerning the importance of effects that explain the slope of the U.S. ag-gregate-demand curve is correct?

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The answer of Which of the following claims concerning the...

Question 15

As an economist working for a U.S. government agency you determine that a particular country has a sacrifice ratio of 3. Policy-makers in that country are thinking of lowering the inflation rate from 10% to 4%. Is this sacrifice ratio higher or lower than the typical estimate? From your numbers, what is the amount of output that will be lost for this country to reduce its inflation rate?

Accepted Answer

Since the sacrifice ratio is the percentage of a country's annual output that must be forgone in order to reduce inflation by 1%, a sacrifice ratio of 3 means that reducing inflation from 10% to 4% will require sacrificing 18% of annual output (3 x 6% = 18%). Therefore, the sacrifice ratio in this case is lower than the typical estimate. The correct answer is D.

Question 16

If the sacrifice ratio is 3, reducing the inflation rate from 10 percent to 6 percent would require sacrificing

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The answer of If the sacrifice ratio is 3, reducing...

Question 17

An economy has a current inflation rate of 12%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, how much annual output must be sacrificed in the transition?

Accepted Answer

The sacrifice ratio is the percentage of annual output lost to reduce inflation by 1%. To reduce inflation from 12% to 4%, a reduction of 8% is needed. With a sacrifice ratio of 2, the economy must sacrifice 16% of annual output (8% reduction * 2).

Question 18

If the sacrifice ratio is 2, reducing the inflation rate from 10 percent to 6 percent would require sacrificing

Accepted Answer

The sacrifice ratio is the amount of output that a country must sacrifice (either through lower output or higher unemployment) in order to decrease the inflation rate by 1 percentage point. In this case, the sacrifice ratio is 2, meaning that for every 1 percentage point decrease in inflation, output must be reduced by 2 percent.

Therefore, to reduce inflation from 10 percent to 6 percent, the inflation rate must be decreased by 4 percentage points, which would require a sacrifice of 8 percent of annual output (4 times 2). Thus, the correct answer is C.

Question 19

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

Proponents of rational expectations believed that people would quickly adjust their expectations based on credible anti-inflation policies, which would result in a lower sacrifice ratio. Therefore, choice D is correct. Choice A is incorrect because proponents of rational expectations did not believe that it was rational for people to maintain their initial expectations despite changes in policies. Choice B is also incorrect because it suggests that a high sacrifice ratio could result from people quickly adjusting their expectations, which is not in line with the rational expectations theory. Similarly, choice C is incorrect because it suggests that people's reluctance to immediately change their expectations could result in a lower sacrifice ratio, which is not what rational expectations theory predicts.

Question 20

The restrictive monetary policy followed by the Fed in the early 1980s

Accepted Answer

The restrictive monetary policy followed by the Fed in the early 1980s significantly reduced inflation, but also led to a severe recession, with high unemployment rates.

Quiz 22: The Short-Run Trade-Off Between Inflation and Unemployment