Question 1

In 1979,Fed Chair Paul Volcker

Accepted Answer

In 1979, Fed Chair Paul Volcker believed that decreasing inflation would temporarily decrease output growth. He then tightened monetary policy to address inflation, which led to a short-term decrease in output growth but ultimately helped to stabilize the economy and reduce inflation in the long run. The other options, A and B, are incorrect as Volcker actually implemented a restrictive monetary policy to address inflation, and he believed that inflation had reached unacceptable levels.

Question 2

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. The other options do not accurately describe the sacrifice ratio.

Question 3

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

Accepted Answer

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

Question 4

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 policy involved increasing interest rates to reduce the money supply, making it more expensive for businesses to borrow money and invest in growth. This led to a significant decrease in demand, which caused a recession. However, over time, the policy succeeded in reducing inflation to more manageable levels.

Question 5

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 answer of An economy has a current inflation rate...

Question 6

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 involved a sudden decrease in the rate of inflation, which initially led to a recession. The public was skeptical that Volcker could achieve such a rapid reduction in inflation and expected that it would not fall as much or as quickly as he claimed. Therefore, choice C is the best answer as it reflects the public's initial perception of the disinflation.

Question 7

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

Proponents of rational expectations argued that people would quickly update their expectations based on credible anti-inflation policy, potentially lowering the sacrifice ratio. Therefore, choice D, which suggests that the sacrifice ratio could be low due to quick adjustments in expectations, is the best answer.

Question 8

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 9

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 made a serious effort to fight inflation, we cannot conclude with certainty that the rational expectations hypothesis is true or false, or that the policymakers lacked credibility. The lower inflation rate could have been the result of the central bank's successful policies, but the serious recession could have been caused by external factors or other policy decisions. Therefore, none of the given choices are certain.

Question 10

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

Accepted Answer

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

Question 11

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 based on empirical evidence that analyzed the period during which Volcker pursued his tight monetary policy, and found that output declines were not as severe as predicted by traditional macroeconomic models.

Question 12

A country is likely to have a higher sacrifice ratio if

Accepted Answer

Sacrifice ratio refers to the output costs of reducing inflation. Contracts that are longer make it difficult for firms to adjust their prices, and if people believe that the central bank will not reduce inflation, they will be less responsive to monetary policy, making the sacrifice ratio higher. Therefore, the combination of longer contracts and lack of faith in the central bank's ability to reduce inflation leads to a higher sacrifice ratio, as seen in option B.

Question 13

Over the long run the Volcker disinflation

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

Question 14

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

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

Question 15

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

Accepted Answer

Rational expectations theory suggests that individuals make predictions about the future based on all available information, including past experiences and current economic conditions. This theory assumes that market participants have access to all relevant information and use it efficiently to make informed decisions.

Question 16

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

Accepted Answer

According to the short-run Phillips curve theory, reducing inflation leads to a temporary increase in unemployment. If the Fed announces a credible policy to reduce inflation, it will shift the short-run Phillips curve to the left, indicating that inflation can be reduced without a large increase in unemployment. As a result, the sacrifice ratio, which is the amount of output lost in order to reduce inflation by 1%, will also decrease. Therefore, the correct choice is (C) left and the sacrifice ratio would fall.

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. The sacrifice ratio measures the short-term costs (in terms of output loss) of reducing inflation; a lower sacrifice ratio indicates that the costs of disinflation were lower than expected. The Volcker disinflation involved a significant increase in interest rates and a recession, leading many economists to believe that the sacrifice ratio would be very high. However, the actual output loss was lower than predicted, leading to a downward revision of estimates for the sacrifice ratio.

Question 18

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

A typical estimate for sacrifice ratio is around 5, so a sacrifice ratio of 3 is lower than the typical estimate. To calculate the amount of output lost, we use the formula: (sacrifice ratio) x (percentage point decrease in inflation) x (annual output). Plugging in the values, we get: 3 x (10-4) x (1) = 18%. Therefore, the correct answer is D.

Question 19

Contractionary monetary policy

Accepted Answer

Contractionary monetary policy aims to decrease the money supply, increase interest rates, and reduce inflationary pressure. As a result, it leads to disinflation (lowering of inflation rates) and shifts the short-run Phillips curve to the left. This is because the relationship between unemployment and inflation is inverse in the short run, and decreasing inflation requires higher unemployment (lower output) in the short run.

Question 20

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, their expectations will shift to lower inflation. This will lead to a shift in the short-run Phillips curve to the left. Additionally, if the central bank is successful in reducing inflation, the sacrifice ratio will fall as the cost of reducing inflation is lower. Therefore, the correct choice is D - the short-run Phillips curve shifts left and the sacrifice ratio will fall.

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