Question 1

If inflation expectations rise, the short-run Phillips curve shifts

Accepted Answer

According to the traditional Phillips curve, there is an inverse relationship between inflation and unemployment in the short run. If inflation expectations rise, firms and workers adjust their behavior and demand higher wages and prices. This leads to a higher level of inflation at any given level of unemployment, which shifts the short-run Phillips curve to the right. As a result, the economy faces higher unemployment to achieve lower inflation or higher inflation to maintain the same level of employment. Therefore, the best choice is D, where the short-run Phillips curve shifts to the right and unemployment rises if inflation remains the same.

Question 2

From 1993-2001 the U.S. economy experienced

Accepted Answer

The period from 1993-2001 is commonly referred to as the "Great Moderation" due to relatively low inflation and unemployment rates. Inflation averaged around 2% and unemployment averaged around 5%, which were both lower than the rates seen in previous decades.

Question 3

Which of the following describes the Volcker disinflation most accurately?

Accepted Answer

The Volcker disinflation, initiated by Federal Reserve Chairman Paul Volcker in the late 1970s and early 1980s, aimed to reduce inflation through high interest rates. A significant portion of the public doubted the Fed's commitment to maintaining low money growth, leading to higher than anticipated unemployment rates. This skepticism contributed to a slower adjustment in inflation expectations, necessitating more aggressive monetary tightening and resulting in higher unemployment.

Question 4

The Volcker disinflation

Accepted Answer

The Volcker disinflation was associated with a fall in output, as prices were stabilized by restricting the growth of the money supply. However, the output fell less than typical estimates of the sacrifice ratio suggested, possibly due to supply-side effects such as increased productivity or the easing of oil supply disruptions that occurred during the period.

Question 5

Contractionary monetary policy

Accepted Answer

Contractionary monetary policy involves reducing the money supply and increasing interest rates in order to decrease aggregate demand and control inflation. This leads to disinflation (a decrease in the rate of inflation) and shifts the short-run Phillips curve leftward, indicating that lower inflation can be achieved at the cost of higher unemployment in the short run.

Question 6

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 reduced inflation significantly, but at the cost of a severe recession. This was due to the high interest rates that were put in place to combat inflation, which led to decreased consumption and investment, and ultimately a slowdown in economic activity. However, the policy was effective in bringing down inflation to more manageable levels in the long run.

Question 7

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 8

Over the long run the Volcker disinflation

Accepted Answer

The answer of Over the long run the Volcker disinflation
...

Question 9

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

Accepted Answer

According to the arguments of Friedman and Phelps, a disinflationary policy that the public does not find credible may result in short-term unemployment, but in the long term, the economy will return to the natural rate of unemployment. This is because workers will eventually adjust their expectations of inflation and wages, which will lead to a return to the natural rate. Therefore, choice B is the best answer.

Question 10

Other things the same, a country that decides to reduce inflation will

Accepted Answer

When a country decides to reduce inflation, it typically does so through monetary policy, such as increasing interest rates. This makes borrowing more expensive, which reduces investments and spending, leading to a decrease in demand for goods and services. As a result, firms may need to lay off workers, leading to higher unemployment rates in the short run. However, in the long run, the economy may adjust, leading to a decrease in the natural rate of unemployment, which is the rate of unemployment that exists when the economy is in equilibrium. Therefore, the country will not have a higher unemployment rate in the long run, and it may even have a lower unemployment rate if the reduction in inflation leads to increased economic growth.

Question 11

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of

Accepted Answer

Favorable supply shocks, such as technological advances and increased productivity, would shift the short-run Phillips curve leftward, resulting in lower inflation and unemployment. Adverse supply shocks would have the opposite effect and shift the curve rightward, leading to higher inflation and unemployment.

Question 12

Considering a plot of the inflation rate and the unemployment rate, one might conjecture that the short run Phillips curve was further to the right in the first part of the 2000's than it was in the last part of the 1990s and 2000.

Accepted Answer

The answer of Considering a plot of the inflation rate...

Question 13

If a central bank attempts to lower the inflation rate but the public doesn't believe the inflation rate will fall as far as the central bank says, then in the short run unemployment

Accepted Answer

The answer of If a central bank attempts to lower...

Question 14

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

Proponents of rational expectations believed that the sacrifice ratio could be low because people would quickly adjust their expectations if they found anti-inflation policy credible. This is because rational expectations assume that people base their expectations on all available information, including government policy, and adjust them accordingly.

Question 15

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 lower their inflation expectations leading to a shift of the short-run Phillips curve to the left. This will result in lower sacrifice ratio as less output will need to be foregone to bring inflation down to the expected level.

Question 16

The consequences of the Volcker disinflation demonstrated that when Volcker announced his intention to reduce inflation quickly, on average the public thought

Accepted Answer

The Volcker disinflation was a deliberate attempt to quickly reduce inflation by increasing interest rates and squeezing the money supply. The consequences were significant, with a deep recession and high unemployment. When Volcker announced his intention to reduce inflation, most people believed that inflation would fall but not by as much or as quickly as he claimed, which turned out to be true. Therefore, option C is the best choice.

Question 17

The experience of the Volcker disinflation of the early 1980s

Accepted Answer

The experience of the Volcker disinflation of the early 1980s generally decreased estimates of the sacrifice ratio, as the actual costs of reducing inflation were lower than predicted by many economists. Thus, the cost of reducing inflation was deemed to be lower than previously thought, leading to lower estimates of the sacrifice ratio.

Question 18

The sacrifice ratio is the

Accepted Answer

The sacrifice ratio refers to the reduction in annual output that results from a given reduction in inflation, expressed as the number of percentage points of output that must be forgone for each percentage point reduction in inflation.

Question 19

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

Accepted Answer

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

Question 20

The monetary-policy framework called inflation targeting is used explicitly by

Accepted Answer

Inflation targeting is used explicitly by most major countries except the United States and Japan. Inflation targeting involves a central bank setting a clear target for the inflation rate and conducting monetary policy to achieve that target. Countries that use inflation targeting include Australia, Canada, New Zealand, Sweden, and many others. The United States and Japan have different monetary policy frameworks that do not explicitly focus on targeting a specific inflation rate.

Quiz 17: The Short-Run Trade-Off Between Inflation and Unemployment