Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually

need to expand the money supply to pay for its expenditures. Thus, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.


If people believe that the government really will honor its promise to reduce inflation, then inflation expectations fall. This change in expectations shifts the short-run Phillips curve left so that at any actual inflation rate the unemployment rate will be lower. If the government reduces money supply growth and at the same time people reduce their inflation expectations, unemployment will rise by less than if people maintain their inflation expectations.

The same argument can be made using the following equation.

Unemployment rate = natural rate of unemployment - a(actual inflation - expected inflation)

Suppose the government reduces actual inflation. If expected inflation is unchanged, then the unemployment rate rises by more than if people revise their expectations of inflation downward.

Economics

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Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:

a. highly price elastic b. price inelastic c. unitarily elastic d. an inferior good e. none of the above

Economics

Which of the following is most likely to reduce the incidence of employee shirking?

a. use of the corporate business structure, rather than an individual proprietorship b. closely relating the pay of workers to their productive contribution c. payment of identical wage rates to all workers d. providing workers with a year-end bonus if the business firm loses money during the year

Economics

Which of the following is the best example of an investment in human capital?

a. an increase in the number of hours worked per week by a worker in an unskilled laboring job b. the purchase of company stock by a worker c. a summer internship at a law firm for someone going to law school d. payments into a retirement pension plan by a skilled laborer

Economics

Answer the next question on the basis of the following data. OutputTotal Cost0$10120228338453573698The average variable cost of producing 3 units of output is

A. $9.33. B. $12.67. C. $10.00. D. $38.00.

Economics