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Sacrifice Ratio quiz

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  • What does the sacrifice ratio measure in economics?
    The sacrifice ratio measures the percentage of GDP lost to reduce inflation by 1%.
  • How does contractionary monetary policy affect aggregate demand?
    Contractionary monetary policy raises interest rates, which lowers aggregate demand.
  • What is the relationship between nominal interest rate, real interest rate, and expected inflation?
    The nominal interest rate equals the real interest rate plus expected inflation.
  • What happens to the short-run Phillips curve when expected inflation increases?
    When expected inflation increases, the short-run Phillips curve shifts to the right.
  • What is the effect of contractionary monetary policy on unemployment in the short run?
    Contractionary monetary policy increases unemployment in the short run.
  • If GDP falls by 3% to reduce inflation by 1%, what is the sacrifice ratio?
    The sacrifice ratio is 3 in this case.
  • What happens to the short-run Phillips curve when expected inflation decreases in the long run?
    The short-run Phillips curve shifts to the left when expected inflation decreases.
  • Why do banks increase nominal interest rates when expected inflation rises?
    Banks increase nominal rates to maintain their desired real return after accounting for higher expected inflation.
  • What is the immediate effect of contractionary policy on the Phillips curve?
    Contractionary policy moves the economy down the short-run Phillips curve, resulting in lower inflation and higher unemployment.
  • In the long run, what happens to unemployment after expected inflation falls?
    Unemployment returns to the natural rate in the long run after expected inflation falls.
  • What is the trade-off policymakers face when reducing inflation?
    Policymakers must accept higher unemployment and lower GDP in the short run to reduce inflation.
  • How does contractionary monetary policy affect the money supply?
    Contractionary monetary policy decreases the money supply.
  • What happens to investment when interest rates rise due to contractionary policy?
    Investment decreases when interest rates rise.
  • What does the sacrifice ratio tell us about the cost of reducing inflation?
    It tells us how much GDP must be sacrificed to lower inflation by 1%.
  • After contractionary policy and adjustment of expectations, where does the economy settle in the long run?
    The economy settles at a lower inflation rate and the natural rate of unemployment in the long run.