Question Details

An incomes policy is designed to 



1. Suppose person A forms his inflation expectations as the average of this period's inflation and last period's inflation, whereas person B forms her expectations rationally (i.e., by using all information plus knowledge of how the macroeconomy operates). Suppose the economy is in equilibrium at its NRU and the Fed surreptitiously increases the money growth rate from 6 percent to 9 percent increasing inflation during the year from 4 percent to 6 percent and lowering unemployment slightly. At the end of this year it becomes clear what the Fed has done; at this point 
A's and B's expected inflations are 
a) 5% and 6% b) 5% and 7% c) 6% and 6% d) 6% and 7% 
Suppose the economy is at its natural rate of unemployment of 6% with a real output of $900 billion, but policymakers plan to reduce inflation from 8 percent to 4 percent gradually over a period of six years by creating a recession. 
2. If the sacrifice ratio is 3, relative to maintaining full employment, what is the cumulative loss in output this recession will entail? 91 
a) $30b or less b) more than $30b but less than $60b 
c) more than $60b but less than $90b d) more than $90b 
3. If Okun's law says that an extra percentage point of unemployment above the natural rate corresponds to a drop in output of 2 percentage points, what unemployment rate will the economy be required to experience over these six years? 
a) 6% or less b) more than 6% but not more than 7% 
c) more than 7% but not more than 8% d) more than 8% 
4. Wage/price controls allow us to 
a) control what is produced in the economy 
b) move more quickly down the long-run Phillips curve 
c) stop inflation without decreasing the rate at which money is growing 
d) deal with inflation without losing the efficiencies of the price system 
5. An incomes policy is designed to 
a) increase everyone's real income b) redistribute income from the rich to the poor 
c) increase the actual income of the unemployed 
d) curb inflation without reducing aggregate demand



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