Question

3. Aggregate Supply Shocks Suppose that a small economy that depends mostly on agriculture experiences a year with exceptionally good conditions for growing crops. What would the good weather do to the Short-run Aaggregate Supply curve and the Short-run Phillips Curve? a. It would shift both the Short-run Aggregate Supply Curve and the Short-run Phillips Curve b. It would shift both the Short-run Aggregate Supply curve and the Short-run Phillips Curve c. It would shift the Short-run Aggregate Supply Curve to the right, and the Short-run d. It would shift the Short-run Ageregate Supply Curve to the left, and the Short-tun Phillips right. left. Phillips Curve to the left Curve to the right. 34. Sacrifice Ratio If the Sacrifice Ratio is 3, reducing the infiation rate from 10 percent to 6 percent would require sacrificing what percent of annual output? a. 2 percent of annual output b. 5 percent of annual output c. 6 percent of annual output d. 12 percent of annual output 35. Expectations Theory Which of the following refers to the theory that people optimally use all available information when forecasting the future? a. rational expectations theory b. perfect expectations theory c. momentum expectations theory d. accommodating expectations theory 36. Time Inconsistency What does the Time Inconsistency of Monetary Policy mean? a. It means that once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower b. It means that at some times central banks think it is more important to keep c. It means that monetary policy is not consistent across time because it is influenced by d. It means that monetary policy cannot be consistent across time because the rate of unemployment. unemployment low; at other times, they think it is more important to keep inflation low politics inflation is fluctuating

Answer 1

1. The good weather would shift the short run aggregate supply curve to the right and the short run Phillips curve to the left. Hence,option(C) is correct.

2. Sacrifice ratio= 3

Reduction in inflation from 10 % to 6% would require sacrificing of (3)(10-6)% = 12% of annual output. Hence,option(D) is correct.

3. Rational expectations theory  refers to the theory that people optimally use all available information when forecasting the future. Hence,option(A) is correct.

4. The time inconsistency of monetary policy means that once people ave formed expectations of low inflation based on a promise by the central bank ,the central bank is tempted to raise inflation to lower unemployment.Hence,option(A) is correct.