Question 1

An economist would be more likely to argue against reducing inflation if she thought that

Accepted Answer

If the central bank lacks credibility, reducing inflation may not be effective as people may not believe that the central bank will stick to its target inflation rate. In addition, if bonds are not indexed for inflation, investors may lose out on their purchasing power when inflation reduces the real value of their bond returns. Thus, an economist may argue against reducing inflation if these two situations hold.

Question 2

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

Accepted Answer

People in countries with high and persistent inflation may have found ways to limit the costs, such as holding assets in foreign currencies or investing in real estate. This reduces their demand for the domestic currency and could result in further inflation as the central bank prints more money to satisfy the demand for it. In addition, policymakers in these countries may be resistant to implementing anti-inflationary policies if they believe that the costs of doing so, such as slower economic growth or higher unemployment, outweigh the benefits.

Question 3

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

Accepted Answer

If lawmakers pass a law requiring the central bank to maintain a low level of inflation, it would imply a lower inflation target, causing the central bank to pursue a more contractionary monetary policy. This would lead to the short-run Phillips curve shifting left, resulting in lower inflation in the short run at a lower cost of disinflation.

Question 4

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Accepted Answer

The answer of Which of the following could the government...

Question 5

If the public correctly perceives that the central bank will reduce inflation, then

Accepted Answer

If the public correctly perceives that the central bank will reduce inflation, then the short-run Phillips curve shifts left, indicating that lower inflation can be achieved at a lower sacrifice ratio. This is because the public's expectations of future inflation will align with the central bank's goals, leading to less resistance to the central bank's policies and a quicker response to changes in monetary policy.

Question 6

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

Accepted Answer

A low sacrifice ratio means that the costs of reducing inflation are relatively low. An expected reduction in inflation also means that markets can adjust and plan for the reduction, further lowering costs. Therefore, option D is the best choice.

Question 7

An economist advising a central bank intending to reduce the inflation rate would likely point out that

Accepted Answer

The answer of An economist advising a central bank intending...

Question 8

Inflation

Accepted Answer

Inflation leads to people using more resources to reduce money holdings by spending it before it loses value. However, it can also make labor markets work more efficiently by allowing for more flexible wages and prices, leading to increased employment and production. This is known as the "menu costs" theory of inflation.

Question 9

If the public correctly perceives that the central bank will reduce inflation, then

Accepted Answer

When the public correctly perceives that the central bank will reduce inflation, they will adjust their expectations and anticipate lower inflation in the future. This will shift the short-run Phillips curve to the left, meaning that at any given level of expected inflation, there will be a lower level of unemployment. Therefore, unemployment will rise by less than otherwise.

Question 10

When wages are fixed by contract, inflation reduces

Accepted Answer

The answer of When wages are fixed by contract, inflation...

Question 11

Which of the following things can a government do to lower the costs of inflation?

Accepted Answer

Selling inflation-indexed bonds helps to protect investors from the effects of inflation, as their returns are adjusted for inflation. By rewriting tax laws so that real rather than nominal gains are taxed, the government can discourage people from holding assets in anticipation of inflation, which can worsen inflation. Both of these actions can help lower the costs of inflation. Option B only addresses one aspect of the problem and may not be as effective. Options C and D do not address the problem at all.

Question 12

If inflation were reduced, then it is

Accepted Answer

The answer of If inflation were reduced, then it is
...

Question 13

Which costs of inflation could the government take action to reduce without reducing inflation?

Accepted Answer

The government could adjust the tax code to account for the effects of inflation and reduce unintended changes in tax liabilities without necessarily reducing inflation.

Question 14

Inflation reduction has the lowest cost when the efforts are

Accepted Answer

The answer of Inflation reduction has the lowest cost when...

Question 15

An economist would be more likely to argue for reducing inflation if she thought that

Accepted Answer

The answer of An economist would be more likely to...

Question 16

Which costs of inflation could the government reduce without reducing inflation?

Accepted Answer

The answer of Which costs of inflation could the government...

Question 17

Which costs of inflation could the government reduce without reducing inflation?

Accepted Answer

The answer of Which costs of inflation could the government...

Question 18

Inflation reduction has the highest cost when the efforts are

Accepted Answer

When inflation reduction efforts are unexpected, it leads to a high sacrifice ratio, which is the cost of reducing inflation in terms of output and employment. This means that the economy will experience a period of lower output and employment before inflation is brought under control. Therefore, unexpected efforts to reduce inflation come at a high cost.

Question 19

A program to reduce inflation is likely to have higher costs if the sacrifice ratio is

Accepted Answer

The sacrifice ratio measures the amount of output lost per percentage point reduction in inflation. Therefore, a high sacrifice ratio indicates that reducing inflation comes at a high cost of lost output. Additionally, an unexpected reduction in inflation can have higher costs as it may result in greater uncertainty and disruption to the economy. Therefore, a program to reduce inflation is likely to have higher costs if the sacrifice ratio is high and the reduction is unexpected.

Question 20

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?

Accepted Answer

The typical estimate of the sacrifice ratio is about 5 percentage points of output for every 1 percentage point reduction in inflation. Therefore, reducing inflation from 3% to 1% would require a reduction of 2 percentage points, resulting in a sacrifice of 10% of output (2 x 5%).

Quiz 36: Six Debates Over Macroeconomic Policy

An economist would be more likely to argue against reducing inflation if she thought that

Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation?

If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to maintain a low level of inflation, it is likely that

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

If the public correctly perceives that the central bank will reduce inflation, then

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

An economist advising a central bank intending to reduce the inflation rate would likely point out that

Inflation

If the public correctly perceives that the central bank will reduce inflation, then

When wages are fixed by contract, inflation reduces

Which of the following things can a government do to lower the costs of inflation?

If inflation were reduced, then it is

Which costs of inflation could the government take action to reduce without reducing inflation?

Inflation reduction has the lowest cost when the efforts are

An economist would be more likely to argue for reducing inflation if she thought that

Which costs of inflation could the government reduce without reducing inflation?

Which costs of inflation could the government reduce without reducing inflation?

Inflation reduction has the highest cost when the efforts are

A program to reduce inflation is likely to have higher costs if the sacrifice ratio is

Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?