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The Short-Run Trade-off between Inflation and Unemployment 8625
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.
8626 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8627
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%.
8628 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8629
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.
8630 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8631
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.
8632 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8633
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.
8634 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8635
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.
8636 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8637
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.
8638 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8639
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.
8640 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8641
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.
8642 The Short-Run Trade-off between Inflation and Unemployment
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.
The Short-Run Trade-off between Inflation and Unemployment 8643
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.
8644 The Short-Run Trade-off between Inflation and Unemployment
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.
