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Sacrifice Ratio quiz

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  • What does the sacrifice ratio measure in macroeconomics?
    The sacrifice ratio measures the percentage of GDP that must be lost to reduce inflation by 1%.
  • How does an increase in expected inflation affect the short-run Phillips curve?
    An increase in expected inflation shifts the short-run Phillips curve to the right.
  • What is the difference between nominal and real interest rates?
    The nominal interest rate is the stated rate on a loan, while the real interest rate is adjusted for inflation.
  • How does contractionary monetary policy affect the money supply?
    Contractionary monetary policy reduces the money supply by actions such as selling Treasury bills.
  • What happens to investment when interest rates rise due to contractionary policy?
    Investment decreases because higher interest rates make borrowing more expensive.
  • What is the relationship between GDP and unemployment according to the Phillips curve?
    Lower GDP is associated with higher unemployment, as shown by the Phillips curve.
  • If GDP falls by 3% to reduce inflation by 1%, what is the sacrifice ratio?
    The sacrifice ratio would be 3 in this case.
  • What immediate effect does contractionary policy have on the short-run Phillips curve?
    Contractionary policy moves the economy down along the short-run Phillips curve, resulting in lower inflation and higher unemployment.
  • In the long run, how do decreased inflation expectations affect the short-run Phillips curve?
    Decreased inflation expectations shift the short-run Phillips curve to the left.
  • What is the natural rate of unemployment?
    The natural rate of unemployment is the level of unemployment the economy returns to in the long run after inflation expectations adjust.
  • Why do banks adjust nominal interest rates for inflation?
    Banks adjust nominal rates for inflation to ensure they earn their desired real interest rate after accounting for rising prices.
  • What is the short-term trade-off when using contractionary policy to reduce inflation?
    The short-term trade-off is lower inflation but higher unemployment and reduced GDP.
  • How does selling Treasury bills help reduce inflation?
    Selling Treasury bills reduces the money supply, which increases interest rates and lowers aggregate demand, helping to reduce inflation.
  • What happens to unemployment when contractionary policy is implemented?
    Unemployment increases in the short run as GDP falls due to lower aggregate demand.
  • After contractionary policy and adjustment of expectations, what is the new long-run equilibrium?
    The new long-run equilibrium features lower inflation and a return to the natural rate of unemployment.