Quiz 542

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Quiz 542

Related: Economics, Microeconomics

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Quiz 542

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

2. In 1979, Fed chair Paul Volcker decided to pursue a policy
a. that would lead to disinflation.
b. that would create falling prices.
c. to accommodate continuing adverse supply shocks.
d. that maintained money growth at its current level.

3. Disinflation is defined as a
a. zero rate of inflation.
b. constant rate of inflation.
c. reduction in the rate of inflation.
d. negative rate of inflation.

4. Disinflation is a reduction in
a. the price level.
b. the inflation rate.
c. the consumer price index.
d. All of the above are correct.

5. Disinflation is a
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.

6. Disinflation is like
a. slowing a car down, whereas deflation is like putting the car into reverse gear.
b. maintaining a car’s speed, whereas deflation is like slowing the car down.
c. putting a car into reverse gear, whereas deflation is like slowing the car down.
d. maintaining a car’s speed, whereas deflation is like putting the car into reverse gear.

7. Disinflation would eventually cause
a. the short-run and the long run Phillips curve to shift right.
b. the short-run and the long run Phillips curve to shift left.
c. the short-run Phillips curve but not the long run Phillips curve to shift right.
d. the short-run Phillips curve but not the long run Phillips curve to shift left.

8. Contractionary monetary policy
a. leads to disinflation and makes the short-run Phillips curve shift right.
b. leads to disinflation and makes the short-run Phillips curve shift left.
c. does not lead to disinflation but makes the short-run Phillips curve shift right.
d. does not lead to disinflation but makes the short-run Phillips curve shift left.

9. The sacrifice ratio is the
a. sum of the inflation and unemployment rates.
b. inflation rate divided by the unemployment rate.
c. number of percentage points annual output falls for each percentage point reduction in inflation.
d. number of percentage points unemployment rises for each percentage point reduction in inflation.

10. 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
a. 1/5.
b. 2.
c. 5/2.
d. 5.

11. If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points and unemployment rise 3 percentage points for six months, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. 4.

12. If a central bank reduced inflation by 2 percentage points and that made output fall by 3 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. None of the above is correct.

13. If a central bank reduced inflation by 2 percentage points and that made output fall by 1 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is
a. 1/2.
b. 1.
c. 2.
d. 4.

14. If a central bank reduced inflation by 3 percentage points and in the short run this made output fall by 3 percentage points for 3 years and the unemployment rate rise from 3 percent to 9 percent for three years, the sacrifice ratio is
a. 1.
b. 2.
c. 3.
d. None of the above is correct.

15. In 1979, when the Fed was deciding how aggressively to fight inflation, the typical estimate of the sacrifice ratio was
a. 1.
b. 5.
c. 7.
d. 10.

16. Typical estimates of the sacrifice ratio suggest that a one-percentage-point reduction in the inflation rate requires
a. a sacrifice of 5 percent of annual output.
b. a sacrifice of 5 percent of government spending.
c. an increase in the unemployment rate of 5 percentage points.
d. a 5 percent increase in the government budget deficit.

17. 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
a. 8 percent to 4 percent.
b. 8 percent to 5 percent.
c. 7 percent to 5 percent.
d. 7 percent to 6 percent.

18. Which of the following scenarios is consistent with typical estimates of the sacrifice ratio?
a. Inflation is reduced from 4 percent to 1 percent, and annual output falls by 10 percent.
b. Inflation is reduced from 6 percent to 4 percent, and annual output falls by 10 percent.
c. Inflation is reduced from 8 percent to 5 percent, and annual output falls by 9 percent.
d. Inflation is reduced from 3 percent to 2 percent, and annual output falls by 3 percent.

19. Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output. This country’s sacrifice ratio is
a. 0.4.
b. 1.5.
c. 2.5.
d. 5.0.

20. If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing
a. 2 percent of annual output.
b. 6 percent of annual output.
c. 8 percent of annual output.
d. 11 percent of annual output.

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

22. If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing
a. 4 percent of annual output.
b. 8 percent of annual output.
c. 12 percent of annual output.
d. 16 percent of annual output.

23. 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?
a. 10%
b. 8%
c. 6%
d. None of the above is correct.

24. Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is
a. 5.
b. 2.
c. 12.
d. None of the above is correct.

25. 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?
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.

26. A country is likely to have a higher sacrifice ratio if
a. contracts are shorter, and people believe the central bank will reduce inflation.
b. contracts are longer, and people believe the central bank will not reduce inflation
c. contracts are longer, and people believe the central bank will reduce inflation.
d. contracts are shorter, and people believe the central bank will not reduce inflation.

27. Which of the following would tend to shorten recessions associated with anti-inflation policies by central banks?
a. People adjust their expectations of inflation rapidly.
b. People believe policy announcements made by central bank officials.
c. The short-run Phillips shifts rapidly.
d. All of the above are correct.

28. Ultimately, the change in unemployment associated with a change in inflation is due to
a. the shape of the long-run aggregate supply curve.
b. unanticipated inflation, not inflation per se.
c. anticipated inflation, not inflation per se.
d. a change in the natural rate of unemployment.

29. In 1979, Fed Chair Paul Volcker
a. instituted an accommodative monetary policy to address adverse supply shocks.
b. believed that inflation had not yet reached unacceptable levels.
c. believed decreasing inflation would temporarily decrease output growth.
d. All of the above are correct.

30. The theory by which people optimally use all available information when forecasting the future is known as
a. rational expectations.
b. perfect expectations.
c. credible expectations.
d. predictive expectations.

31. If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift
a. right and the sacrifice ratio would fall.
b. right and the sacrifice ratio would rise.
c. left and the sacrifice ratio would fall.
d. left and the sacrifice ratio would rise.

32. Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as
a. 0.
b. 1.
c. 4.
d. 5.

33. If people believe that the central bank is going to reduce inflation, then
a. the short-run Phillips curve shifts right and the sacrifice ratio will rise.
b. the short-run Phillips curve shifts right and the sacrifice ratio will fall.
c. the short-run Phillips curve shifts left and the sacrifice ratio will rise.
d. the short-run Phillips curve shifts left and the sacrifice ratio will fall.

34. In the late 1970s, proponents of rational expectations argued that
a. the Fed should not attempt to aggressively fight inflation.
b. the sacrifice ratio was smaller than previously thought.
c. the short run was relatively long.
d. None of the above is correct.

35. Proponents of rational expectations argued that the sacrifice ratio
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.

36. The restrictive monetary policy followed by the Fed in the early 1980s
a. reduced both unemployment and inflation.
b. reduced inflation significantly, but at the cost of a severe recession.
c. reduced unemployment significantly, but at the cost of higher inflation.
d. raised both unemployment and inflation.

37. The Volcker disinflation
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.

38. 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
a. the rational expectations hypothesis is false.
b. the rational expectations hypothesis is true.
c. the policymakers lacked credibility.
d. None of the above is certain.

39. The experience of the Volcker disinflation of the early 1980s
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.

40. The consequences of the Volcker disinflation demonstrated that when Volcker announced his intention to reduce inflation quickly, on average the public thought
a. he would try to fool them by raising inflation to decrease unemployment.
b. inflation would be unchanged.
c. inflation would fall but not by as much or as quickly as Volcker claimed.
d. inflation would fall even further than Volcker was willing to admit.

41. Over the long run the Volcker disinflation
a. shifted the short-run and long-run Phillips curves left.
b. shifted the short-run, but not the long-run Phillips curve left.
c. shifted the long-run, but not the short-run Phillips curve left.
d. None of the above is correct.

42. Which of the following describes the Volcker disinflation most accurately?
a. Almost all of the public believed that the Fed would keep money growth low, so unemployment rose less than it would have otherwise.
b. Almost all of the public believed that the Fed would keep money growth low, so unemployment rose more than it would have otherwise.
c. Much of the public did not believe that the Fed would keep money growth low, so unemployment rose less than it would have otherwise.
d. Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise.

43. Between 1993 and 2001 the U.S. economy experienced
a. relatively low inflation and unemployment rates.
b. relatively high inflation and unemployment rates.
c. relatively low inflation rates and relatively high unemployment rates.
d. relatively high inflation rates and relatively low unemployment rates.

44. 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
a. adverse supply shocks that shifted the short-run Phillips curve left.
b. adverse supply shocks that shifted the short-run Phillips curve right.
c. favorable supply shocks that shifted the short-run Phillips curve left.
d. favorable supply shocks that shifted the short-run Phillips curve right.

45. 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.
a. If so, this might have been the result of a negative supply shock or an increase in expected inflation.
b. If so, this might been the result of a negative supply shock, or a decrease in expected inflation.
c. If so, this might have been the result of a positive supply shock, or an increase in expected inflation.
d. If so, this might have been the result of a positive supply shock, or a decrease in expected inflation.

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.

46. Refer to The Economy in 2008. The effects of the housing and financial crises could be shown by shifting
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. aggregate supply to the left.

47. Refer to the Economy in 2008. In the short-run the housing and financial crises
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.

48. Refer to the Economy in 2008. The effects of increased prices of world commodities is shown by shifting
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. aggregate supply to the left.

49. Refer to The Economy in 2008. In the short run the increased prices of world commodities
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.

50. Refer to The Economy in 2008. Given the effects of the financial and housing crisis on the price level and output and the effects of increased world commodity prices on the price level and output, the aggregate demand and aggregate supply model tells us that
a. output rises and the price level falls.
b. output may rise, fall or stay the same and the price level rises.
c. output falls and the price level may rise, fall or stay the same.
d. None of the above is correct.

51. Refer to The Economy in 2008. The short-run effects of the housing and financial crisis are shown by
a. moving to the right along the short-run Phillips curve.
b. moving to the left along the short-run Phillips curve.
c. shifting the short-run Phillips curve right.
d. shifting the short-run Phillips curve left.

52. Refer to The Economy in 2008. In the short-run the effects of the housing and financial crises
a. raise both inflation and the unemployment rate.
b. raise the inflation rate and reduce the unemployment rate.
c. reduce the inflation rate and raise the unemployment rate.
d. reduce both the inflation rate and the unemployment rate.

53. Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by
a. moving to the right along the short-run Phillips curve.
b. moving to the left along the short-run Phillips curve.
c. shifting the short-run Phillips curve right.
d. shifting the short-run Phillips curve left.

54. 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
a. rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
b. rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
c. falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
d. falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

55. 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
a. rises. As inflation expectations adjust, the short-run Phillips curve shifts right.
b. rises. As inflation expectations adjust, the short-run Phillips curve shifts left.
c. falls. As inflation expectations adjust, the short-run Phillips curve shifts right.
d. falls. As inflation expectations adjust, the short-run Phillips curve shifts left.

56. Other things the same, a country that decides to reduce inflation will
a. have a higher unemployment rate in the short run and the long run.
b. have a higher unemployment rate only in the long run.
c. have a higher unemployment rate only in the short run.
d. not have a higher unemployment rate in either the short run or the long run.

57. 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
a. should not see an increase in the unemployment rate even in the short run.
b. will having rising unemployment for a while, but then return to the natural rate of unemployment.
c. will have a permanently higher unemployment rate.
d. None of the above is suggested by the arguments of Friedman and Phelps.

58. The monetary-policy framework called inflation targeting is used explicitly by
a. no major country.
b. most major countries except the United States and Japan.
c. the United States, but it is not used by other major countries.
d. most major countries, including the United States and Japan.

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

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.

60. Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.
a. both the Classical dichotomy and the long-run Phillips curve
b. the Classical dichotomy, but not the long run Phillips curve
c. the long-run Phillips curve, but not the Classical dichotomy
d. neither the long-run Phillips curve nor the Classical dichotomy

61. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If Flosserlanders believe their government then which, if any, curve(s) shift left?
a. the short-run and the long-run Phillips curve
b. the short-run but not the long run Phillips curve
c. the long-run but not the short-run Phillips curve
d. neither the short-run nor the long-run Phillips curve

62. 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% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then
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 22% 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 22% inflation.

63. 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
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.

64. 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% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
a. unemployment falls, but it would have fallen less if people had been expecting 12.5% inflation.
b. unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
c. unemployment rises, but it would have risen less if people had been expecting 12.5% inflation.
d. unemployment rises, but it would have risen less if people had been expecting 25% inflation.

65. 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.

66. 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.

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.

67. 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

68. 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%.

69. 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%.

70. 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.

71. 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

72. 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%

73. 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.

74. 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.

75. 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.

76. 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.

77. 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.

78. 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.

79. 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.

80. 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.

81. 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.

82. 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.

83. 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.

84. 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.

85. According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is
a. higher in the short-run and the long-run.
b. higher in the short-run only.
c. lower in the short-run and the long-run.
d. lower in the short-run only.

86. Which of the following both make the sacrifice ratio higher than otherwise?
a. the Phillips curve is steep, inflation expectations adjust quickly.
b. the Phillips curve is steep, inflation expectations adjust slowly.
c. the Phillips curve is flat, inflation expectations adjust quickly
d. the Phillips curve is flat, inflation expectations adjust slowly.

87. The very low inflation that the U.S. experienced in 2009 and 2010
a. appears to have reduced expected inflation, and the short-run Phillips curve shifted downward as a result.
b. appears to have reduced expected inflation, and the short-run Phillips curve shifted upward as a result.
c. does not appear to have reduced expected inflation, and the short-run Phillips curve remained relatively stable as a result.
d. does not appear to have reduced expected inflation, but the short-run Phillips curve shifted dramatically nevertheless.

88. A common explanation for the behavior of the short-run U.S. Phillips curve in 2009 and 2010 is that, over the previous 20 or so years, the Federal Reserve had
a. established a lot of credibility in its commitment to keep inflation at about 2 percent.
b. established a lot of credibility in its commitment to keep inflation at about 5 percent.
c. failed to establish significant credibility in its announced intent to keep inflation at about 2 percent.
d. failed to establish significant credibility in its announced intent to keep inflation at about 5 percent.

89. Suppose the economy is currently experiencing 9% inflation per year. If the Fed wants to reduce inflation to 3% and the sacrifice ratio is 4, then how much annual output must be sacrificed in the transition?
a. 4%
b. 8%
c. 16%
d. 24%

90. Suppose the economy is currently experiencing 6% inflation per year. If the Fed wants to reduce inflation to 2% and the sacrifice ratio is 5, then how much annual output must be sacrificed in the transition?
a. 5%
b. 10%
c. 15%
d. 20%

Quiz 542