Question 1

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run

Accepted Answer

The answer of Other things the same, if the central...

Question 2

Most economists believe that a tradeoff between inflation and unemployment exists

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The answer of Most economists believe that a tradeoff between...

Question 3

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is

Accepted Answer

The sacrifice ratio is the percentage of output lost for every percentage point decrease in inflation. In this scenario, the sacrifice ratio can be calculated as follows:

Sacrifice ratio = Percentage change in output / Percentage point decrease in inflation

= -3 / -2

= 3/2

Therefore, the answer is B, 3/2.

Question 4

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.

Question 5

The long-run response to an increase in the growth rate of the money supply is shown by shifting

Accepted Answer

An increase in the growth rate of the money supply will lead to an increase in inflation in the short run, causing the short-run Phillips curve to shift right. However, in the long run, the increase in the money supply will lead to an increase in the price level without affecting the unemployment rate, causing the long-run Phillips curve to remain unchanged. Therefore, the correct answer is only the short-run Phillips curve will shift right (Option D).

Question 6

The long-run response to a decrease in the money supply growth rate is shown by shifting

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The answer of The long-run response to a decrease in...

Question 7

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

Low inflation and low unemployment suggest a shift in the short-run Phillips curve to the left. This could be due to favorable supply shocks, such as increased productivity or lower oil prices, that allow for lower prices and higher output without causing higher inflation. Adverse supply shocks would shift the curve to the right, causing both inflation and unemployment to rise.

Question 8

Which of the following is not correct?

Accepted Answer

Unemployment can also be influenced by factors such as changes in technology, demographics, and the overall state of the economy, in addition to government policy.

Question 9

In response to the financial crisis of 2007-2008, policymakers used

Accepted Answer

Policymakers used both expansionary monetary policy (such as lowering interest rates and increasing the money supply) and expansionary fiscal policy (such as increasing government spending and cutting taxes) to combat the financial crisis and stimulate economic growth. This approach was aimed at increasing consumer and business borrowing, investment, and spending, which in turn would boost aggregate demand and output.

Question 10

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

Accepted Answer

If inflation expectations rise, the short-run Phillips curve shifts right. This means that at any given level of unemployment, there will be a higher level of inflation. Therefore, if inflation remains the same, unemployment must rise to adjust to the new equilibrium point.

Question 11

Suppose the economy is in long-run equilibrium at an inflation rate of 1% Then inflation expectations rise to 2% and inflation rises to 3%. The increase in expected inflation shifts the short-run Phillips curve

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The answer of Suppose the economy is in long-run equilibrium...

Question 12

Which of the following played a role in depressing aggregate demand in 2001?

Accepted Answer

All of the above factors contributed to a decrease in aggregate demand in 2001. The end of the stock-market bubble led to a decrease in consumer confidence and spending, while corporate accounting scandals reduced investors' confidence and investment. The terrorist attacks on September 11 also had a significant impact on consumer and investor confidence, as well as causing disruption to travel and business activity.

Question 13

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.

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

Question 14

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

Accepted Answer

Decreasing the rate at which the central bank increases the money supply is a contractionary monetary policy, which typically leads to a decrease in aggregate demand and a decrease in inflation in the short run. However, this policy could also lead to an increase in unemployment in the short run due to the decrease in aggregate demand. Therefore, option B is the most appropriate choice as it captures both the short-term effects of lower inflation and higher unemployment.

Question 15

If a central bank reduced inflation by 4 percentage points and this made output fall by 5 percent for one year and 3 percent for another year and the unemployment rate rise 2.5 percent above its natural rate for one year and 1.5 percent above its natural rate for another year, the sacrifice ratio was

Accepted Answer

The sacrifice ratio is the percentage reduction in output for every 1 percentage point reduction in inflation. In this case, the central bank reduced inflation by 4 percentage points, and output fell by a total of 8 percent (5 percent for one year and 3 percent for another year). Therefore, the sacrifice ratio is 2 (8 percent output loss divided by 4 percentage point reduction in inflation). The increase in unemployment rate above its natural rate is not used in the calculation of the sacrifice ratio but is a cost of reducing inflation.

Question 16

If a central bank announced that it was going to decrease inflation by 5%, people revised their inflation expectations downward by 4%, and the central bank only lowered inflation by 1%, the short run Phillips curve would shift

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The answer of If a central bank announced that it...

Question 17

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 is not completely credible will lead to an initial increase in unemployment due to workers being reluctant to accept lower wages, but over time, this reluctance will dissipate and the economy will return to its natural rate of unemployment. Therefore, option B is the best choice. Option A is incorrect because there should be an initial temporary increase in unemployment. Option C is incorrect because the unemployment rate will eventually return to the natural rate, not remain permanently higher. Option D is incorrect because the arguments of Friedman and Phelps do provide a suggestion for the short-run and long-run effects of a disinflationary policy with low credibility.

Question 18

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment

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The answer of Suppose a central bank takes actions that...

Question 19

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

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

Question 20

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

Accepted Answer

When a country decides to reduce inflation, it often involves implementing contractionary monetary or fiscal policies. These policies will decrease aggregate demand, leading to a decrease in output and employment in the short run. However, in the long run, prices will adjust, and the economy will return to its natural level of output with no effect on the employment rate. Therefore, there will be a short-run increase in unemployment, but in the long run, there will be no effect on the unemployment rate.

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