Question

Inflation reduction has the highest cost when the efforts are a.credible so that the sacrifice ratio...

Inflation reduction has the highest cost when the efforts are

a.credible so that the sacrifice ratio is high.

b.credible so that the sacrifice ratio is low.

c.unexpected so that the sacrifice ratio is high.

d.unexpected so that the sacrifice ratio is low

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate supply shifts left, the central bank must

a.decrease the money supply, which will move output farther from its long-run level.

b.decrease the money supply, which will move output back towards its long-run level.

c.increase the money supply, which will move output farther from its long-run level.

d.increase the money supply, which will move output back towards its long-run level.

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Homework Answers

Answer #1

Q1) The answer is (c) unexpected so that the sacrifice ratio is high.

(a) and (b) are false as if the efforts are credible then cost of inflation are lowered as there is no uncertainty

(d) is false as for costs to be high, the sacrifice ratio must be higher.

Q2) As the AS curve shifts left, the price level will rise. This will lead to a decrease in the money supply and the new equilibrium output will move output farther from its long-run level as the economy contracts. Thus, the answer is (a)

All other options are incorrect as the money supply will not increase and output will not move output back towards its long-run level

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