Macroeconomics: Policy and Practice, 2e (Mishkin)
Chapter 11 Aggregate Supply and the Phillips Curve
11.1 The Phillips Curve
1) The idea behind the Phillips curve is that ________.
A) tight labor markets lead to inflationary pressures
B) when the unemployment rate is low, wages will increase
C) when firms raise wages to attract new workers, prices will also increase
D) all of the above
E) none of the above
2) The idea behind the Phillips curve is that ________.
A) tightness in the labor market raises wages but has little impact on prices
B) when the unemployment rate is low, wages will decrease
C) when firms raise wages to attract new workers, prices will also increase
D) all of the above
E) none of the above
3) The idea behind the Phillips curve is that ________.
A) when the unemployment rate is low wages will decrease
B) tightness in the labor market puts upward pressures on wages and prices
C) when firms raise wages to attract new workers, prices decrease
D) all of the above
E) none of the above
4) The idea behind the Phillips curve is that ________.
A) tightness in the labor market puts downward pressures on wages and prices
B) when the unemployment rate is low wages will increase
C) when firms raise wages to attract new workers, prices decrease
D) all of the above
E) none of the above
5) ________ is (are) the endogenous variable(s) in the Phillips curve.
A) Expected inflation
B) Inflation
C) The natural rate of unemployment
D) all of the above
E) none of the above
6) In the 1960s, the Phillips curve was ________.
A) a very popular explanation for inflation fluctuations
B) consistent with a clear negative relationship between inflation and unemployment
C) suggestive of a permanent trade off between inflation and unemployment
D) all of the above
E) none of the above
7) In the 1960s, the Phillips curve was ________.
A) consistent with a positive relationship between inflation and unemployment
B) suggestive of a temporary trade off between inflation and unemployment
C) a very popular explanation for inflation fluctuations
D) all of the above
E) none of the above
8) In the 1960s, advocates of the Phillips curve suggested ________.
A) an “optimal” goal of 1% unemployment and 1% to 2% inflation rates could be achieved
B) a “realistic” goal of 7% unemployment and 6% to 7% inflation rates could be achieved
C) a “nonperfectionist” goal of 3% unemployment and 4% to 5% inflation rates could be
achieved
D) all of the above
E) none of the above
9) The Phillips curve was ________.
A) never very popular in policy circles
B) influential in efforts to bring the unemployment rate down to low levels
C) generally confirmed in the 1970s, when low unemployment persisted despite rising inflation
D) all of the above
E) none of the above
10) The Phillips curve was ________.
A) adopted by economic policy teams in the Kennedy and Johnson administrations
B) influential in efforts to bring the unemployment rate down to low levels
C) discredited in the 1970s, when both inflation and unemployment were relatively high
D) all of the above
E) none of the above
11) Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
A) that firms and workers care about nominal, not real wages
B) that wages have a one-to-one relationship with inflation
C) that, in the long run, the level of unemployment is independent of inflation
D) all of the above
E) none of the above
12) Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
A) that a “realistic” goal of 7% unemployment and 6% to 7% inflation rates could be achieved
B) that, in the long run, sticky wages and staggered prices prevent unemployment from
remaining low
C) that firms and workers care about real wages
D) all of the above
E) none of the above
13) Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
A) that firms and workers care about nominal, not real wages
B) that wage changes have a one-to-one relationship with changes in expected inflation
C) that, in the long run, prices are flexible, so unemployment cannot remain above zero
D) all of the above
E) none of the above
14) Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
A) that firms and workers care about real wages
B) that inflation and expected inflation influence each other
C) that, in the long run, the level of unemployment is independent of inflation
D) all of the above
E) none of the above
15) Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
A) that inflation is directly related to expectations of future inflation
B) that inflation is negatively related to the unemployment gap
C) that in the long run unemployment will be at the natural rate
D) all of the above
E) none of the above
16) What can be concluded from Milton Friedman and Edmund Phelps’ expectations-augmented
Phillips curve?
A) that there is no long run tradeoff between unemployment and inflation
B) that there is a short run tradeoff between unemployment and inflation
C) that there are two types of Phillips curves
D) all of the above
E) none of the above
17) What can be concluded from Milton Friedman and Edmund Phelps’ expectations-augmented
Phillips curve?
A) that there is a long run tradeoff between unemployment and inflation
B) that there is a short run tradeoff between unemployment and inflation
C) that inflation is positively related to the unemployment gap
D) all of the above
E) none of the above
18) In Milton Friedman and Edmund Phelps’ expectations-augmented Phillips curve, ________.
A) unemployment will, in the long run, reach the natural rate
B) in the long run, expected inflation will reach the NAIRU
C) inflation is positively related to the unemployment gap
D) all of the above
E) none of the above
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19) The Long-Run Phillips Curve is vertical, suggesting that ________.
A) allowing inflation to rise will not succeed in keeping unemployment low
B) changes in unemployment have no lasting impact on inflation
C) shifts of the short-run Phillips curve impact inflation, but have no effect on unemployment
D) all of the above
E) none of the above
20) Observations of inflation in the 1970s prompted what further addition to the Phillips curve?
A) price shocks
B) expected inflation
C) personal consumption expenditures
D) all of the above
E) none of the above
21) Which of the following might cause an upward shift of the modern Phillips curve?
A) an increase in oil prices
B) an increase in the price of imports
C) wage agreements that include compensation for inflation
D) all of the above
E) none of the above
22) ________ will cause a movement along the modern Phillips curve.
A) An increase in oil prices
B) An increase in the price of imports
C) Wage agreements that include compensation for inflation
D) all of the above
E) none of the above
23) On the modern Phillips curve, the initial impact of an increase in the world price of steel is
shown by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
D) a downward movement along the Phillips curve to higher unemployment rates
E) none of the above
24) On the modern Phillips curve, the initial impact of government policies to stimulate the
economy is shown by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
D) a downward movement along the Phillips curve to higher unemployment rates
E) none of the above
25) On the modern Phillips curve, the initial impact of productivity improvements that lower the
costs of production is shown by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
D) a downward movement along the Phillips curve to higher unemployment rates
E) none of the above
26) On the modern Phillips curve, the beginning of a recession is shown by ________.
A) an upward movement along the Phillips curve to a higher inflation rate
B) an upward shift of the Phillips curve leading to higher inflation rates for any unemployment
rate
C) a downward shift of the Phillips curve leading to lower inflation rates for any unemployment
rate
D) a downward movement along the Phillips curve to higher unemployment rates
E) none of the above
27) As wages and prices become more flexible ________.
A) wages becomes less responsive to unemployment deviations from the natural rate
B) it becomes easier to differentiate the short-run from the long-run Phillips curve
C) inflation becomes more responsive to unemployment deviations from the natural rate
D) all of the above
E) none of the above
28) If wages and prices become extremely flexible ________.
A) there is no trade off between inflation and unemployment
B) unemployment can hardly deviate from the natural rate
C) it becomes very difficult to differentiate the short-run from the long-run Phillips curve
D) all of the above
E) none of the above
29) As wages and prices become more sticky ________.
A) inflation becomes more responsive to unemployment deviations from the natural rate
B) wages become less responsive to unemployment deviations from the natural rate
C) it becomes more difficult to differentiate the short-run from the long-run Phillips curve
D) all of the above
E) none of the above
30) As wages and prices become more sticky ________.
A) the short-run Phillips curve gets flatter
B) wages become less responsive to unemployment deviations from the natural rate
C) it becomes easier to differentiate the short-run from the long-run Phillips curve
D) all of the above
E) none of the above
31) If expectations about inflation are adaptive, they are ________.
A) formed by looking at the future
B) likely to change rapidly
C) based on past inflation
D) all of the above
E) none of the above
32) If expectations about inflation are adaptive, they are ________.
A) not based on all available, relevant information
B) backward-looking
C) likely to change slowly
D) all of the above
E) none of the above
33) If expectations about inflation are adaptive, they are ________.
A) quick to respond to price shocks
B) consistent with the notion of sticky prices
C) based on changes in productivity
D) all of the above
E) none of the above
34) According to the accelerationist Phillips curve, ________.
A) expectations adjust continually to the latest information
B) increases in inflation cause the unemployment gap to widen
C) inflation will change so long as an unemployment gap persists
D) all of the above
E) none of the above
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35) An example of a price shock is ________.
A) an increase in wages as a result of higher expected inflation
B) the arrival of immigrants seeking employment
C) the decline in autonomous spending that results from rising unemployment
D) all of the above
E) none of the above
36) Given the accelerationist Phillips curve Δπ = – 0.3 (U – 6) + ρ, suppose that inflation in the
preceding period was 3 percent, unemployment is 6 percent, and there is a price shock of 2
percent. The current inflation rate is ________.
A) 3 percent
B) 0.2 percent
C) 5 percent
D) 1 percent
E) none of the above
37) Given the accelerationist Phillips curve Δπ = – 0.3 (U – 6) + ρ, suppose that inflation in the
preceding period was 3 percent, unemployment is 7 percent, and there is no price shock. The
current inflation rate is ________.
A) 2.7 percent
B) 3 percent
C) 0.9 percent
D) 3.3 percent
E) none of the above
38) Given the accelerationist Phillips curve Δπ = – 0.7 (U – 5) + ρ, suppose that inflation has
increased from 8 percent to 10 percent. If the unemployment rate is 4 percent, then the price
shock is ________.
A) 2.7 percent
B) 0.6 percent
C) 1.3 percent
D) 1 percent
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39) Based on the data in this table,
U
ρ
π
period 1
6
1
4
period 2
8
0
2.2
period 3
8
2
2.4
if the inflation rate in period zero had been 3 percent, then the accelerationist Phillips curve is
________.
A) Δπ = – 1.8 (U – 7) + ρ
B) Δπ = – 1.1 (U – 6) + ρ
C) Δπ = – 0.9 (U – 6) + ρ
D) Δπ = – 0.4 (U – 9) + ρ
E) none of the above
40) Based on the data in this table,
U
ρ
π
period 1
6
1
4
period 2
8
0
3.2
period 3
8
2
4.4
If the natural rate of unemployment is steady at 7 percent, and, in period four, there is no price
shock and unemployment is 8 percent, then the inflation rate in period 4 will be ________
percent.
A) 4.4
B) 3.6
C) 3.4
D) 1.6
E) none of the above
41) Based on the data in this table,
U
ρ
π
period 1
6
1
4
period 2
7
0
4.5
period 3
6
2
??
If the natural rate of unemployment is steady at 8 percent, what is the inflation rate in period 3?
A) 8.5 percent
B) 7.5 percent
C) 5.5 percent
D) 6.3 percent
E) none of the above
42) Why is there no long-run trade-off between unemployment and inflation?
43) What are price shocks? Why were they not included in the original formulation of the
Phillips curve? Why were they added to the modern Phillips curve?
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44) How do you suppose most people form an expectation of future inflation? Is that method
consistent with the assumption of adaptive expectations?
45) A. W. Phillips’ 1958 paper examined unemployment and wage growth. What role, if any,
does wage growth play in the modern Phillips curve?
46) Suppose the government lowers unemployment by hiring more government workers. How
does it matter whether wages and prices are sticky?