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If we let inflation get away on us again, even for just a while, the path back to price stability 



"We cannot afford to take any major risks with inflation. If we let inflation get away on us again, even for just a while, the path back to price stability will be even more painful than it has been during the last few years." 
1. This painful path will involve 
a) high taxes b) high interest rates 
c) high unemployment d) both b) and c) above 
2. Why would letting inflation get away for only a while require a painful return? 
a) the short-run Phillips curve is asymmetric 
b) inflation expectations rise quickly but fall slowly 
c) the short-run Phillips curve shifts upward quickly but downward slowly 
d) all of the above 
3. "'Walk, don't run,' is the message from the monetary authorities. Clearly, their thinking is that what the economy needs now is not a speedy recovery from recession, but one that is slow, drawn out and, in many respects, painful." This is because a speedy recovery 
a) will not create quality jobs b) discourages long-term growth 
c) will push interest rates too low d) risks pushing the economy below the NRU 
4. "The evidence of the 1970s and beyond is that whenever governments stepped in to administer stimulative medicine, they triggered runaway inflation which finally had to be stopped with strong, painful doses of recession." This clipping is consistent with all of the following except 
a) frequent underestimation of the NRU b) an asymmetric short-run Phillips curve 
c) inflation expectations rising quickly but falling slowly 
d) the short-run Phillips curve shifting downwards quickly but upwards slowly 
5. "He warned yesterday that economic recovery in the Western world could be short-lived if governments injected too much financial stimulus into their economies in an 88 
attempt to boost employment and output." The economic recovery would be short-lived because 
a) crowding out will kill the recovery 
b) the economy would move so quickly out of recession that the "recovery" period would be short 
c) inflation would be created which would be fought by pushing the economy back into recession 
d) an increase in taxes would be required to pay for the extra financial stimulus, dampening economic activity



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