Question 1

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)  The sacrifice ratio is higher than the typical estimate.It will cost 30% of annual output to reach the new inflation target.
B)  The sacrifice ratio is higher than the typical estimate.It will cost 18% of annual output to reach the new inflation target.
C)  The sacrifice ratio is lower than the typical estimate.It will cost 30% of annual output to reach the new inflation target.
D)  The sacrifice ratio is lower than the typical estimate.It will cost 18% of annual output to reach the new inflation target.E) All of the above
F) B) and C)

Question 2

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

Accepted Answer

A)  left.If inflation remains the same,unemployment falls.
B)  left.If inflation remains the same,unemployment rises.
C)  right.If inflation remains the same,unemployment falls.
D)  right.If inflation remains the same,unemployment rises.E) B) and C)
F) A) and D)

Question 3

In 1979,when the Fed was deciding how aggressively to fight inflation,the typical estimate of the sacrifice ratio was

Accepted Answer

A)  1.
B)  5.
C)  7.
D)  10.E) None of the above
F) B) and C)

Question 4

Monetary Policy in Flosserland

In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.

-Refer to Monetary Policy in Flosserland.Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level.Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%.Then

Accepted Answer

A)  unemployment falls,but it would have fallen more if people had been expecting 12.5% inflation.
B)  unemployment falls,but it would have fallen more if people had been expecting 25% inflation.
C)  unemployment rises,but it would have risen more if people had been expecting 12.5% inflation.
D)  unemployment rises,but it would have risen more if people had been expecting 25% inflation.E) A) and D)
F) None of the above

Question 5

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year,the sacrifice ratio is

Accepted Answer

A)  1/5.
B)  2.
C)  5/2.
D)  5.E) A) and D)
F) A) and C)

Question 6

An economy has a current inflation rate of 7%.If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2,then how much annual output must be sacrificed in the transition?

Accepted Answer

A)  10%
B)  8%
C)  6%
D)  None of the above is correct.E) None of the above
F) B) and C)

Question 7

The Volcker disinflation

Accepted Answer

A)  had virtually no impact on output,just as the classical dichotomy suggested.
B)  was associated with rising output,perhaps due to expansionary fiscal policy.
C)  caused output to fall,but by less than the typical estimate of the sacrifice ratio suggested.
D)  None of the above is correct.E) A) and B)
F) A) and C) C

Question 8

Which of the following is not correct?

Accepted Answer

A)  In the short run,policymakers face a tradeoff between inflation and unemployment.
B)  Events that shift the long-run Phillips curve right shift the long-run aggregate supply curve left.
C)  Unemployment can be changed only by the use of government policy.
D)  The decrease in output associated with reducing inflation is less if the policy change is announced ahead of time and is credible.E) A) and B)
F) All of the above

Question 9

If the sacrifice ratio is 4,then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Accepted Answer

A)  4 percent of annual output.
B)  8 percent of annual output.
C)  12 percent of annual output.
D)  16 percent of annual output.E) C) and D)
F) All of the above

Question 10

The experience of the Volcker disinflation of the early 1980s

Accepted Answer

A)  generally increased estimates of the sacrifice ratio.
B)  generally decreased estimates of the sacrifice ratio.
C)  clearly refuted the predictions of the proponents of rational expectations.
D)  clearly refuted the predictions of the opponents of rational expectations.E) C) and D)
F) A) and D)

Question 11

Proponents of rational expectations argued that the sacrifice ratio

Accepted Answer

A)  could be high because it was rational for people not to immediately change their expectations.
B)  could be high because people might adjust their expectations quickly if they found anti-inflation policy credible.
C)  could be low because it was rational for people not to immediately change their expectations.
D)  could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.E) A) and C)
F) A) and B) D

Question 12

The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to the Economy in 2008.In the short-run the housing and financial crises

Accepted Answer

A)  raised both the price level and output.
B)  raised the price level and reduced output.
C)  reduced the price level and raised output.
D)  reduced both the price level and output.E) All of the above
F) None of the above

Question 13

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

Accepted Answer

A)  expansionary monetary policy and expansionary fiscal policy.
B)  expansionary monetary policy and contractionary fiscal policy.
C)  contractionary monetary policy and expansionary fiscal policy.
D)  contractionary monetary policy and contractionary fiscal policy.E) B) and C)
F) B) and D)

Question 14

Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania reduced inflation to its announced goal of 5%.However the unemployment rate was on average higher for many years after.A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because (1) by itself the decrease in inflation had permanently increased unemployment and (2) that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage.Which of these arguments is consistent with the Phillip's curve model?

Accepted Answer

A)  both explanations 1 and 2
B)  neither explanation 1 nor 2
C)  explanation 1 but not explanation 2
D)  explanation 2 but not explanation 1E) None of the above
F) All of the above

Question 15

Most economists believe that a tradeoff between inflation and unemployment exists

Accepted Answer

A)  only in the short run.
B)  only in the long run.
C)  in both the short and long run.
D)  in neither the short nor long run.E) B) and D)
F) B) and C)

Question 16

Soon after he became the chairman of the Federal Reserve System in 1979,Paul Volcker embarked on a course

Accepted Answer

A)  of accommodative monetary policy.
B)  of disinflation.
C)  that was designed to reduce the unemployment rate.
D)  that produced results that were clearly consistent with those predicted by rational-expectations theorists.E) A) and C)
F) All of the above

Question 17

Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output.This country's sacrifice ratio is

Accepted Answer

A)  0.4.
B)  1.5.
C)  2.5.
D)  5.0.E) A) and B)
F) A) and C)

Question 18

Disinflation is a

Accepted Answer

A)  reduction in the price level,whereas deflation is a reduction in the rate of inflation.
B)  reduction in the rate of inflation,whereas deflation is a reduction in the price level.
C)  slow reduction in the price level,whereas deflation is a rapid reduction in the price level.
D)  rapid reduction in the price level,whereas deflation is a slow reduction in the price level.E) None of the above
F) A) and D)

Question 19

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

Accepted Answer

A)  cost 1 percent of annual output.
B)  cost 4 percent of annual output.
C)  imply that unemployment would rise by 1%.
D)  imply that unemployment would rise by 4%.E) C) and D)
F) A) and C)

Question 20

Typical estimates of the sacrifice ratio suggest that about 10 percent of annual output has to be given up in order to reduce the inflation rate from

Accepted Answer

A)  8 percent to 4 percent.
B)  8 percent to 5 percent.
C)  7 percent to 5 percent.
D)  7 percent to 6 percent.E) A) and D)
F) B) and D) C

Exam 22: The Short Run Trade Off Between Inflation and Unemployment: The Cost of Reducing Inflation

Correct Answer
verified

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

Correct Answer
verified

In 1979,when the Fed was deciding how aggressively to fight inflation,the typical estimate of the sacrifice ratio was

Correct Answer
verified

Correct Answer
verified

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year,the sacrifice ratio is

Correct Answer
verified

An economy has a current inflation rate of 7%.If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2,then how much annual output must be sacrificed in the transition?

Correct Answer
verified

The Volcker disinflation

Correct Answer
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C

Which of the following is not correct?

Correct Answer
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If the sacrifice ratio is 4,then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Correct Answer
verified

The experience of the Volcker disinflation of the early 1980s

Correct Answer
verified

Proponents of rational expectations argued that the sacrifice ratio

Correct Answer
verified
D

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to the Economy in 2008.In the short-run the housing and financial crises

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Most economists believe that a tradeoff between inflation and unemployment exists

Correct Answer
verified

Soon after he became the chairman of the Federal Reserve System in 1979,Paul Volcker embarked on a course

Correct Answer
verified

Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output.This country's sacrifice ratio is

Correct Answer
verified

Disinflation is a

Correct Answer
verified

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

Correct Answer
verified

Typical estimates of the sacrifice ratio suggest that about 10 percent of annual output has to be given up in order to reduce the inflation rate from

Correct Answer
verified
C

Exam 22: The Short Run Trade Off Between Inflation and Unemployment: The Cost of Reducing Inflation

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In 1979,when the Fed was deciding how aggressively to fight inflation,the typical estimate of the sacrifice ratio was

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year,the sacrifice ratio is

Correct AnswerverifiedShow Answer

An economy has a current inflation rate of 7%.If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2,then how much annual output must be sacrificed in the transition?

Correct AnswerverifiedShow Answer

The Volcker disinflation

Correct AnswerverifiedC

Which of the following is not correct?

Correct AnswerverifiedShow Answer

If the sacrifice ratio is 4,then reducing the inflation rate from 9 percent to 5 percent would require sacrificing

Correct AnswerverifiedShow Answer

The experience of the Volcker disinflation of the early 1980s

Correct AnswerverifiedShow Answer

Proponents of rational expectations argued that the sacrifice ratio

Correct AnswerverifiedD

The Economy in 2008 In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. -Refer to the Economy in 2008.In the short-run the housing and financial crises

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Most economists believe that a tradeoff between inflation and unemployment exists

Correct AnswerverifiedShow Answer

Soon after he became the chairman of the Federal Reserve System in 1979,Paul Volcker embarked on a course

Correct AnswerverifiedShow Answer

Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output.This country's sacrifice ratio is

Correct AnswerverifiedShow Answer

Disinflation is a

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Typical estimates of the sacrifice ratio suggest that about 10 percent of annual output has to be given up in order to reduce the inflation rate from

Correct AnswerverifiedC

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C

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D

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C