Question 1

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%, then
A)unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
B)unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.
C)unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.
D)unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

Accepted Answer

The answer of Refer to Monetary Policy in Mokania. The...

Question 2

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
A)right and unemployment would rise.
B)right and unemployment would fall.
C)left and unemployment would rise.
D)left and unemployment would fall.

Accepted Answer

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

Question 3

Which of the following is not correct?
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.

Accepted Answer

Unemployment can also be influenced by various factors such as changes in technology, consumer preferences, and global competition, in addition to government policies.

Question 4

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
A)1.
B)2.
C)3.
D)None of the above is correct.

Accepted Answer

The sacrifice ratio represents the percentage loss of output required to permanently reduce inflation by 1 percentage point. 
In this case, the central bank reduced inflation by 4 percentage points, which means a sacrifice of output for two years. 
To calculate the sacrifice ratio, we add up the percentage loss of output for both years and divide it by the percentage reduction in inflation:

Sacrifice ratio = ((5% + 3%) / 2) / 4% = 2

Therefore, the answer is B.

Question 5

The long-run response to a decrease in the money supply growth rate is shown by shifting
A)the short-run and long-run Phillips curves left.
B)the short-run and long-run Phillips curves right.
C)only the short-run Phillips curve left.
D)only the short-run Phillips curve right.

Accepted Answer

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

Question 6

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?
A)Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.
B)Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1.
C)Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3.
D)Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.

Accepted Answer

The sacrifice ratio is the percentage of GDP that must be sacrificed to permanently reduce inflation by 1 percentage point. In this case, the Bank of Mokania reduced inflation from 15% to 5%, meaning a total reduction of 10 percentage points. The sacrifice ratio is calculated by dividing the percentage point reduction in inflation by the percentage increase in unemployment and the percentage decrease in output. In this case, the sacrifice ratio would be 10/(10 + 30) = 0.25. Therefore, initially people's inflation expectations had been higher than 5% and the sacrifice ratio was 3 (1/0.25 = 4).

Question 7

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?
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 1

Accepted Answer

The answer of Refer to Monetary Policy in Mokania. The...

Question 8

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If Mokanians lower their inflation expectations, which curve shifts to the left?
A)both the short-run and the long-run Phillips curves
B)neither the short-run nor the long-run Phillips curves
C)only the short-run Phillips curve
D)only the long-run Phillips curve

Accepted Answer

If Mokanians lower their inflation expectations, only the short-run Phillips curve shifts to the left. This is because the short-run Phillips curve shows the inverse relationship between inflation and unemployment in the short-run, while the long-run Phillips curve is vertical at the natural rate of unemployment and represents the relationship between inflation and expected inflation. Therefore, a change in inflation expectations can only affect the short-run Phillips curve, and not the long-run Phillips curve.

Question 9

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run
A)the short-run Phillips curve shifts right.
B)the short-run Phillips curve shifts left.
C)the long-run Phillips curve shifts right.
D)the long-run Phillips curve shifts left.

Accepted Answer

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

Question 10

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 was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures. Then
A)unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
B)unemployment falls, but it would have fallen less if people had been expecting 35% inflation.
C)unemployment rises, but it would have risen less if people had been expecting 25% inflation.
D)unemployment rises, but it would have risen less if people had been expecting 35% inflation.

Accepted Answer

If people were expecting 25% inflation, then they may have been prepared for the possibility of a rise in unemployment as the Department of Finance implements policies to reduce inflation. However, if people were skeptical and thought inflation would actually rise to 30%, they may have adjusted their expectations and behavior accordingly, potentially leading to a more significant rise in unemployment than if they had expected 25% inflation. Therefore, if unemployment does rise due to the Department of Finance's actions, it would likely have risen less if people had been expecting 25% inflation instead of 30% or higher.

Question 11

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then
A)unemployment rises but it would have risen by more if people had expected inflation to be 6%.
B)unemployment rises but it would have risen by less if people had expected inflation to be 6%.
C)unemployment falls but it would have fallen by more if people had expected inflation to be 6%.
D)unemployment falls but it would have fallen by less if people had expected inflation to be 6%.

Accepted Answer

If people had expected inflation to be only 10%, then they would have assumed that the economy is already at a lower unemployment rate implying higher inflation. Therefore, if inflation falls to 5%, it means that the central bank has to undertake contractionary monetary policy which generally involves raising interest rates to reduce aggregate demand, leading to higher unemployment in the short run. However, if people had expected inflation to fall only to 6%, then the central bank's contractionary policy would have been less severe, which means the rise in unemployment would have been less than the scenario where people had expected inflation to be 10%. So, the rise in unemployment is less than what it would have been if people had higher expectations about inflation. Hence, option B is the correct answer.

Question 12

The long-run response to an increase in the growth rate of the money supply is shown by shifting
A)the short-run and long-run Phillips curves left.
B)the short-run and long-run Phillips curves right.
C)only the short-run Phillips curve left.
D)only the short-run Phillips curve right.

Accepted Answer

The answer of The long-run response to an increase in...

Question 13

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
A)right. Overall, unemployment moves above its natural rate.
B)right. Overall, unemployment moves below its natural rate.
C)left. Overall, unemployment moves above its natural rate.
D)left. Overall, unemployment moves below its natural rate.

Accepted Answer

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

Question 14

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
A)5/2.
B)3/2.
C)2/3.
D)2/5.

Accepted Answer

The sacrifice ratio is the percentage of output lost for each percentage point reduction in inflation. In this case, the sacrifice ratio is calculated as ((3/2)/2) = 3/4 or 0.75. This means that for every 1 percentage point reduction in inflation, output will decrease by 0.75%. Therefore, the correct answer is B) 3/2.

Question 15

Refer to Monetary Policy in Flosserland. Suppose the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level. Suppose at first that the public thought inflation would only drop to 18%, but eventually become convinced that the inflation rate will stay at 12.5%.
A)unemployment rises in the short run, and remains higher than it's original value in the long run.
B)unemployment rises in the short run, and is the same as it's original value in the long run.
C)unemployment falls in the short run, and is lower than it's original value in the long run.
D)unemployment falls in the short run, and is the same as it's original value in the long run.

Accepted Answer

The answer of Refer to Monetary Policy in Flosserland. Suppose...

Question 16

Other things the same, if the central bank decreases the rate at which it increases the money supply, then
A)unemployment and inflation rise in the short run.
B)unemployment rises and inflation falls in the short run.
C)unemployment falls and inflation rises in the short run.
D)unemployment and inflation fall in the short run.

Accepted Answer

If the central bank decreases the rate at which it increases the money supply, it means there is less money in circulation, which is likely to lead to a decrease in demand and a fall in inflation. However, the decrease in the money supply is also likely to have a negative impact on the economy in the short run, leading to a rise in unemployment. Therefore, unemployment rises and inflation falls in the short run.

Question 17

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

Accepted Answer

Expansionary monetary policy involves increasing the money supply and decreasing interest rates, while expansionary fiscal policy involves increasing government spending and/or decreasing taxes. These policies were used in response to the financial crisis of 2007-2008 to stimulate economic growth and prevent a deeper recession.

Question 18

Which of the following played a role in depressing aggregate demand in 2001?
A)the end of a stock-market bubble
B)corporate accounting scandals
C)the terrorist attacks on September 11 of that year
D)All of the above are correct.

Accepted Answer

All three factors played a role in depressing aggregate demand in 2001. The end of the stock-market bubble caused a decline in consumer and business confidence and a decrease in wealth, leading to lower spending. Corporate accounting scandals reduced trust in the business sector, leading to decreased investment. The terrorist attacks on September 11 caused a decline in consumer and business confidence, disrupted economic activity, and led to increased security spending.

Question 19

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?
A)both people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
B)neither people expecting inflation to fall to 7% instead of 5%, and the favorable supply shock
C)only the favorable supply shock
D)only people expecting inflation to fall to 7% instead of 5%

Accepted Answer

The answer of Refer to Monetary Policy in Mokania. The...

Question 20

Most economists believe that a tradeoff between inflation and unemployment exists
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.

Accepted Answer

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

Quiz 35: The Short-Run Tradeoff Between Inflation and Unemployment

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%, then

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

Which of the following is not correct?

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

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If Mokanians lower their inflation expectations, which curve shifts to the left?

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

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then

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

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

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

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

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

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

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?

Most economists believe that a tradeoff between inflation and unemployment exists