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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.
