Question

Which of the following would cause the price level to rise and output to fall in the short run?

a.	an increase in the money supply
b.	a decrease in the money supply
c.	an adverse supply shock
d.	a favourable supply shock

19. Which of the following best defines the political business cycle?

a.	the fact that about every four years some politician advocates greater government control of the Bank of Canada
b.	the potential for a central bank to increase the money supply and so output to help the incumbent get re-elected
c.	the part of the business cycle caused by the reluctance of politicians to smooth the business cycle
d.	the changes in output created by the monetary rule the Bank of Canada must follow

23. In which of the following situations does inflation reduction have the lowest cost?

a.	when the efforts are credible, so that the sacrifice ratio is low
b.	when the efforts are credible, so that the sacrifice ratio is high
c.	when the efforts are unexpected, so that the sacrifice ratio is high
d.	when the efforts are unexpected, so that the sacrifice ratio is low

Answer 1

First question. Option C. An adverse supply shock

Explanation: In an adverse supply shock, there is a sudden fall in the supply of goods which results in a higher price level.

19. Option B

Explanation: In simple words, the political business cycle results from the efforts of the incumbent politicians to increase the money supply in order to stimulate the economy so that there is a higher chance of them getting reelected.

23. Option A

Explanation: Sacrifice ratio measures the fall in the output for reducing inflation by a certain percentage. While reducing inflation, the sacrifice ratio is low when the efforts to reduce inflation is credible.