Question

A country is likely to have a higher sacrifice ratio if

A. contracts are longer, and people believe the central bank will not reduce inflation

B. contracts are longer, and people believe the central bank will reduce inflation.

C. contracts are shorter, and people believe the central bank will reduce inflation.

D. contracts are shorter, and people believe the central bank will not reduce inflation.

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 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 1.

B. Initially people's inflation expectations had been lower 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 higher than 5%. The sacrifice ratio was 3.

According to the Friedman-Phelps analysis, in the long run actual inflation equals expected inflation and unemployment is at its natural rate.

a. TRUE b. FALSE

If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the

A. left. It remains to the left regardless of monetary policy.

B. right. It remains to the right if the central bank pursues expansionary monetary policy.

C. right. It remains to the right regardless of monetary policy.

D. left. It remains to the left if the central bank pursues expansionary monetary policy.

Answer 1

1) option A)

For larger contracts, Sacrifice ratio is higher , & when monetary policy is not credible

2) option D)

Sacrifice ratio = fall in gdp in 1 year/ disinflation

= 30/(15-5)

= 30/10

= 3

Initially people were expecting higher inflationary expectations, > 5%

3) option A)

True

Friedman & phelps concluded that Phillips curve relationship doesn't follow in long run.

So long run PC is Vertical, at natural rate of unemployment

4) option C)

Due to adverse supply shock, for any given unemployment rate, π is higher

So it shifts upwards to right,

Since it's a supply shock, so demand side policies, monetary policy won't be effective