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Philips Curve
Multiple-choice questions
1.The Phillips Curve is currently used to illustrate the trade-off between:
A.employment and unemployment.
B.inflation and price stability.
C.employment and labor force.
D.inflation and unemployment.
E.shifts in aggregate demand and employment
2.The economic Phillips Curve model was based on research done by A.W. Phillips that examined the trade-off between:
A.inflation and unemployment.
B.inflation and employment.
C.price levels and inflation.
D.unemployment and money wage rates.
E.money wage rates and inflation
3.A short-run Phillips Curve measures a trade-off that occurs
A.over a period of less than six months.
B.at a time when the economy is not at full employment equilibrium.
C.only when the economy is experiencing inflation.
D.only if wage rates are rising.
E.at a constant rate.
4.Which of the following statements is true?
A.There is a constant slope to the Phillips Curve from decade to decade.
B.The Phillips Curve proves a causal relationship between inflation and unemployment.
C.There is a tendency at some point in short-run equilibrium for unemployment and inflation to have an inverse relationship.
D.There are no other variables that affect the Phillips Curve except the two that are plotted.
E.The Phillips Curve proves that stabilization policies should not be attempted.
5.The Phillips Curve is a mirror image of the
A.aggregate demand curve.
B.short-run aggregate supply curve.
C.employment and unemployment ratio.
D.of a regression analysis of inflation and unemployment data.
E.comparative decade unemployment analysis.
6.When comparing the Phillips Curve to the Aggregate Demand/Aggregate Supply graph which of the following is true?
A.The Phillips Curve is related most closely to the aggregate demand curve because they both have a negative slope.
B.There can only be a short-run Phillips Curve.
C.There is no correlation between the short-run aggregate supply curve and the Phillips Curve.
D.The reason why the short-run aggregate supply curve has a positive slope and the Phillips Curve has a negative slope is because the horizontal axis on the ADAS can be used to
estimate employment and the horizontal axis on the Phillips curve measures unemployment.
E.The is never a correlation between a change in price level and inflation.
7.If a supply shock occurs and shifts the short-run aggregate supply curve inward so that there is less production at a higher price level
A.the trade-off between unemployment and inflation will remain constant.
B.there will always be more unemployment at the same level of inflation.
C.there will always be more inflation at the same level of unemployment.
D.there could be more unemployment and inflation simultaneously.
E.The decrease in employment will never affect the price level.
8.Which of the following best represents the three major reasons why the short-run Phillips Curve shifts?
A.a negative supply shock, a change in expected inflation, an increase in Aggregate Demand
B.a negative supply shock, a positive supply shock, a change in expected inflation
C.a negative supply shock, a positive supply shock, a decrease in Aggregate Demand
D.a positive supply shock, a change in expected inflation, a decrease in Aggregate Demand
E.a negative supply shock, a change in expected inflation, a decrease in Aggregate Demand
9.An unexpected increase in energy costs would have which of the following effects on the short-run Phillips Curve?
A.It would lead to a movement left on the shortrun Phillips Curve.
B.It would lead to a movement right on the shortrun Phillips Curve.
C.It would lead to a rightward shift of the shortrun Phillips Curve.
D.It would lead to a leftward shift of the shortrun Phillips Curve.
E.It would not effect the shortrun Phillips Curve.
10.The effect of stagflation on the Phillips Curve is
A.a shift of the short-run Phillips Curve to the left.
B.a shift of the short-run Phillips Curve to the right.
C.a movement right along the short-run Phillips Curve.
D.a movement left along the short-run Phillips Curve.
E.a movement down the long-run Phillips Curve.
11.The problem with the short-run Phillips Curve is
A.It does not tell us which of the two variables is the cause and which is the effect.
B.It cannot be used to illustrate the influence of expected inflation.
C.It has no correlation to the short-run aggregate supply curve.
D.It does not deal with any other variable that could be influencing the inflation and unemployment rates.
E.It cannot be applicable to a short-run stagflation problem.
12.The long-run Phillips Curve
A.illustrates the long-run trade-off between the inflation rate and the unemployment rate.
B.Illustrates that there is no trade-off between the inflation rate and the unemployment rate in the long run..
C.Illustrates that there is no such thing as a natural rate of unemployment.
D.Illustrates that in the long-run the inflation rate remains constant.
E.Illustrates that in the long-run there is no structural nor frictional unemployment.
13.If an economy experienced a spurt of technological improvement that had an effect on all industries, the short-run Phillips Curve would:
A.not change but there would be a movement along the curve.
B.shift upward because there would be more inflation and more unemployment.
C.shift upward because there would be less inflation and less unemployment.
D.shift downward because there would be more inflation and more unemployment.
E.shift downward because there would be less inflation and less unemployment.
14.A movement along the short-run Philips Curve illustrates the statistical relationship between unemployment and inflation that:
A.only occurs when Fiscal policy is used to affect aggregate demand.
B.only occurs when Monetary Policy is used to affect aggregate demand.
C.occurs when either Fiscal Policy or Monetary Policy are used to affect aggregate demand.
D.occurs when Fiscal Policy is used to affect aggregate supply.
E.occurs when Monetary or Fiscal Policy is used to affect aggregate supply.
15.According to the long-run Phillips Curve, which of the following is true?
A.Unemployment increases with an increase in inflation.
B.Unemployment decreases with an increase in inflation.
C.Increased automation will lead to lower levels of structural unemployment in the long run.
D.Changes in the composition of the overall demand for labor tend to be deflationary in the long run.
E.The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.
16.An increase in which of the following will lead to lower inflation and lower unemployment?
A.Exports
B.Aggregate Demand
C.Labor Productivity
D.Government Spending
E.The international value of domestic currency
17.Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?
A.The government increases spending without increasing taxes
B.The government increases taxes without increasing spending.
C.Inflationary expectations decline.
D.Women and teen-agers stay out of the labor force.
E.Negative supply shocks cause factor prices to increase.
18. A decrease in the duration of unemployment benefits
(A)raises the natural rate of unemployment and raises inflation
(B)lowers both the natural rate of unemployment and inflation.
(C)lowers the natural rate of unemployment and raises inflation
(D)raises the natural rate of unemployment and lowers inflation.
19. Which of the following statements best describes inflation:
(A)Any increase in the price level.
(B)An increase in price of a major industry
(C)An increase in the rate of upward change of the price level
(D)A decrease in the rate of upward change of the price level.
(E)An increase in the rate of downward change of the price level
20. The price level is the :
(A) weighted average price of all goods
(B) weighted average price of all goods and services
(C) weighted average price of all services
(D) weighted average price of exported goods and services
(E) weighted average price of all non-agricultural products and services
21. Unexpected inflation:
(A) creates less problems for an economy than expected inflation.
(B) hurts all individuals in an economy.
(C) helps banks and individuals who have loaned money.
(D) helps debtors.
(E) effects all assets equally.
22. Inflation always has a negative affect on:
(A)currency
(B)gold
(C)debtors
(D)wages with cost of living adjustments
(E)gold speculators
23.When events such as 9/11 occur the price of gold will frequently increase. The most plausible explanation of this increase in gold is:
(A)People fear that the production of gold will decrease and sell their gold.
(B)People expect inflation to occur and sell their gold.
(C)People fear the loss of purchasing power and hold more paper money
(D)People expect deflation to occur and buy gold
(E)People expect inflation to occur and buy more gold
24.Which of the following is the best measure of how inflation affects consumers?
(A)The increase in the price of gold
(B)The increase in the consumer price index
(C)The increase in the price of a single product
(D)The decrease in the consumer price index
(E)The increase in the purchasing power of the dollar
25.The real value of an asset is equal to:
(A)The nominal value plus the rate of inflation
(B)The real value minus the nominal value
(C)The nominal value minus the rate of inflation
(D)The nominal value minus the consumer price index
(E)The nominal value plus the consumer price index
26.Given that the consumer price index for each of three years is:
Year 1 = CPI = 100
Year 2 = CPI = 180
Year 3 = CPI = 198
The inflation rate for year 2 is:
(A)180%
(B)80%
(C)40%
(D)there is no inflation because deflation has occurred
(E)cannot be calculated with the given information
27.Given that the consumer price index for each of three years is: Year 1 = cpi = 100
Year 2 = cpi = 180 Year 3 = cpi = 198
The inflation rate for year 3 is:
(A)198%
(B)18%
(C)9%
(D)10%
(E)cannot be calculated with the data given
28.If the interest rate offered to depositors by banks in Year 1 is 7% and the banks expected the 3% inflation that occurred, the banks would experience:
(A)A disappointing cost for deposits of 7%
(B)A disappointing cost for deposits of 4%
(C)An expected nominal cost for deposits of 4%
(D)An expected real cost for deposits of 3%
(E)An expected real cost for deposits of 4%
29.The purchasing power of the dollar will:
(A)increase if there is unanticipated inflation.
(B)increase if there is unanticipated inflation but not if there is expected inflation.
(C)decrease if there is unanticipated inflation but not if there is expected inflation
(D)decrease if there is unanticipated inflation or expected inflation
(E)increase if there is anticipated inflation and decrease if there is unanticipated inflation
30.When rational consumers expect inflation to occur, they are more likely to
(A)Buy expensive goods sooner
(B)Postpone the purchase of expensive goods.
(C)Hoard dollars.
(D)Invest in newly issued fixed rate bonds that have not accounted for the expected inflation.
(E)Adapt consuming habits that will discourage inflation.
31.If a ten year $1,000 bond paying 5% was issued two years ago, and unexpected inflation has occurred, currently this bond will:
(A)Still pay $50 in interest and sell for $1,000
(B)Pay less than $50 in interest.
(C)Still pay $50 in interest but sell for more than $1,000
(D)Pay less than $50 in interest but sell for less than $1,000
(E)Still pay $50 in interest but sell for less than $1,000
32.Which of the following entities is most likely to benefit by unexpected inflation?
(A)A bank that has substantial loans out.
(B)A worker who has a 5 year contract without a cola adjustment.
(C)A government that has substantial debt.
(D)A retired worker on a fixed income
(E)A homeowner with an adjustable rate mortgage.
33.Which of the following will suffer the most from inflation?
(A)A worker with a cola adjustment in her contract.
(B)A homeowner with a fixed rate mortgage.
(C)A retiree on a fixed income.
(D)An investor with real assets.
(E)A debtor nation
Free-response questions
1. Inflation and expected inflation are important determinants of economic activity.
(a)Draw a correctly labeled graph of a short-run Phillips curve.
(b)Using your graph in part (a), show the effect of an increase in the expected rate of inflation.
(c)What is the effect of the increase in the expected rate of inflation on the long-run Phillips curve?
(d)Given the increase in the expected rate of inflation from part (b),
(i)will the nominal interest rate on new loans increase, decrease, or remain unchanged?
(ii)will the real interest rate on new loans increase, decrease, or remain unchanged?
(e)Assume that the nominal interest rate is 8 percent. Borrowers and lenders expect the rate of inflation to be 3 percent, and the growth rate of real gross domestic product is 4 percent. Calculate the real interest rate.
2.Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.
a. a rise in the natural rate of unemployment b. a decline in the price of imported oil
c. a rise in government spending d. a decline in expected inflation
3.Suppose that a fall in consumer spending causes a recession.
a.Illustrate the changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. What happens to inflation and unemployment in the short run?
b.Now suppose that over time expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation–unemployment combinations?
4. Suppose the economy is in a long-run equilibrium.
a.Draw the economy’s short-run and long-run Phillips curves.
b.Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?
c.Now suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part (a).
If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?
If the Fed undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate?
Explain why this situation differs from that in part (b).
5. The price of oil fell sharply in 1986 and again in 1998.
a. Show the impact of such a change in both the aggregate-demand/aggregate-supply diagram and in the Phillips-curve diagram. What happens to inflation and unemployment in the short run?
b. Do the effects of this event mean there is no short-run tradeoff between inflation and unemployment? Why or why not?
6. Suppose the Federal Reserve announced that it would pursue contractionary monetary policy in order to reduce the inflation rate. Would the following conditions make the ensuing recession more or less severe? Explain.
a.Wage contracts have short durations.
b.There is little confidence in the Fed’s determination to reduce inflation.
c.Expectations of inflation adjust quickly to actual inflation.