Exam 22: The Short Run Trade Off Between Inflation and Unemployment: The Cost of Reducing Inflation

In 1979,Fed chair Paul Volcker decided to pursue a policy

If a central bank reduced inflation by 3 percentage points and in the short run this made output fall by 3 percentage points for 3 years and the unemployment rate rise from 3 percent to 9 percent for three years,the sacrifice ratio is

Proponents of rational expectations theory argued that,in the most extreme case,if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations,the sacrifice ratio could be as small as

If a central bank reduced inflation by 4 percentage points and this made output fall by 5 percent for one year and 3 percent for another year and the unemployment rate rise 2.5 percent above its natural rate for one year and 1.5 percent above its natural rate for another year,the sacrifice ratio was

Other things the same,a country that decides to reduce inflation will

Suppose the economy is in long-run equilibrium at an inflation rate of 1% Then inflation expectations rise to 2% and inflation rises to 3%.The increase in expected inflation shifts the short-run Phillips curve

The consequences of the Volcker disinflation demonstrated that when Volcker announced his intention to reduce inflation quickly,on average the public thought