Deck 17: The Phillips Curve and Expectations Theory

Question 1

On a Phillips curve diagram, a decrease in the rate of inflation, other things being equal, is represented by a(n):

A)upward movement along the Phillips curve.
B)downward movement along the Phillips curve.
C)upward shift of the Phillips curve.
D)downward shift of the Phillips curve.

Answer 1

downward movement along the Phillips curve.

Question 2

On a Phillips curve diagram, a decrease in the rate of inflation, other things being equal, is represented by a(n):

A)upward shift of the Phillips curve.
B)downward movement along Phillips curve.
C)upward movement along the Phillips curve.
D)downward shift of the Phillips curve.

Answer 2

downward movement along Phillips curve.

Question 3

The Phillips curve illustrates the relationship between:

A)change in the money supply and change in unemployment.
B)tax rates and tax revenues.
C)the equilibrium level of income and the employment rate.
D)inflation and unemployment.

Answer 3

inflation and unemployment.

Question 4

Economists began to lose confidence in the Phillips curve during the:

A)1930s.
B)1960s.
C)1970s.
D)1980s.
E)1990s.

Question 5

The modern view of the Phillips curve suggests that:

A)when inflation is reduced, unemployment will fall below the natural rate.
B)the Phillips curve is an unstable relationship.
C)systematic demand stimulus policies will be unable to affect prices in the long run.
D)there will be a trade-off between inflation and unemployment in the long run.

Question 6

Movements along the Phillips curve result in the:

A)savings rate varying inversely with the unemployment rate.
B)inflation rate varying directly with the unemployment rate.
C)inflation rate varying inversely with the unemployment rate.
D)interest rate varying inversely with the unemployment rate.

Question 7

According to the Phillips curve, a more expansionary macro-policy that causes inflation to be greater will:

A)place downward pressure on prices.
B)reduce unemployment.
C)reduce output.
D)reduce the natural rate of unemployment.

Question 8

In the United States, the Phillips curve in the 1960s:

A)shifted upward dramatically.
B)shifted upward moderately.
C)remained stable.
D)shifted downward moderately.
E)shifted downward dramatically.

Question 9

The tradeoff between the inflation rate and unemployment rate is represented by the:

A)consumption function.
B)misery index.
C)Phillips curve.
D)Keynes curve.

Question 10

Experience with the Phillips curve since the 1970s has shown that the:

A)curve can be used as a reliable model to guide public policy.
B)relationship between the inflation rate and the unemployment rate moves in a clockwise direction.
C)curve is not stable.
D)inflation rate and the unemployment rate are equal.

Question 11

A Phillips curve shows the relationship between the inflation rate and the:

A)wage rate.
B)unemployment rate.
C)real GDP growth rate.
D)population growth rate.

Question 12

Since the 1970s, the Phillips curve has:

A)remained stable.
B)moved in a clockwise direction.
C)been unstable.
D)been used as a reliable model to guide public policy.

Question 13

Each point on the Phillips curve represents a combination of the:

A)prime rate and the savings rate.
B)savings rate and the unemployment rate.
C)inflation rate and the unemployment rate.
D)consumption rate and the inflation rate.

Question 14

On a Phillips curve diagram, an increase in the rate of inflation, other things being equal, is represented by a(n):

A)upward movement along the Phillips curve.
B)downward movement along the Phillips curve.
C)upward shift of the Phillips curve.
D)downward shift of the Phillips curve.

Question 15

Each point on the Phillips curve represents a combination of the:

A)consumption rate and the unemployment rate.
B)savings rate and the inflation rate.
C)interest rate and the savings rate.
D)inflation rate and the unemployment rate.

Question 16

Suppose that the economy experiences an increase in the inflation rate at the same time that the unemployment rate decreases. This situation indicates a:

A)shift in the Phillips curve.
B)movement along a vertical Phillips curve.
C)movement along a horizontal Phillips curve.
D)movement along a positively-sloped Phillips curve.
E)movement along a negatively-sloped Phillips curve.

Question 17

Which of the following curves show an inverse relationship between a nation's inflation and unemployment rates?

A)The aggregate demand curve.
B)The aggregate supply curve.
C)The short-run Phillips curve.
D)The long-run Phillips curve.

Question 18

The Phillips curve:

A)is downward sloping.
B)is upward sloping.
C)shows there is a tradeoff between unemployment and the inflation rate.
D)shows there is a tradeoff between population and the inflation rate.

Question 19

The Phillips curve relates the inflation rate to the:

A)unemployment rate.
B)GDP.
C)disposable personal income.
D)interest rate.

Question 20

The Phillips curve shows a negative relationship between the:

A)consumption rate and the unemployment rate.
B)savings rate and the inflation rate.
C)interest rate and the savings rate.
D)inflation rate and the unemployment

Question 21

Exhibit 17-1 Inflation and unemployment rates The name of the graph in Exhibit 17-1 is the:

A)Laffer curve.
B)aggregate supply curve.
C)aggregate demand curve.
D)Keynesian curve.
E)Phillips curve.

Question 22

The inverse trade-off between inflation and unemployment is known as the:

A)Laffer curve.
B)aggregate supply curve.
C)Phillips curve.
D)aggregate demand curve.
E)Keynesian curve.

Question 23

The Phillips curve:

A)was relatively well-defined during the 1960s.
B)demonstrates how to achieve stable economic growth.
C)shows the trade-off between deficits and inflation.
D)helps to stimulate entrepreneurial profits.
E)becomes vertical at full employment.

Question 24

Exhibit 17-1 Inflation and unemployment rates The graph in Exhibit 17-1 indicates a(n):

A)direct relationship.
B)quadratic relationship.
C)exponential relationship.
D)inverse relationship.
E)hyperbolic relationship.

Question 25

Under the natural rate hypothesis, expansionary monetary and fiscal policies can at best produce a:

A)permanent change in the unemployment rate.
B)short-run change in the unemployment rate.
C)permanent change in the inflation rate.
D)short-run change in the long-run Phillips curve.

Question 26

If the long-run Phillips curve is vertical, then any government policy designed to lower:

A)unemployment will not change the unemployment rate and only increase the inflation rate.
B)unemployment will work leaving the inflation rate unchanged.
C)inflation will cause employment to rise.
D)unemployment will work causing the inflation rate to fall.
E)unemployment will work causing inflation to rise.

Question 27

The long-run Phillips curve is a(n)____ line at the natural rate of unemployment.

A)horizontal
B)vertical
C)upward-sloping
D)downward-sloping

Question 28

Exhibit 17-1 Inflation and unemployment rates In Exhibit 17-1, when the unemployment rate goes from 9 percent to 1 percent, the:

A)level of inflation is unaffected.
B)inflation rate goes from 3 percent to 14 percent.
C)inflation rate goes from 3 percent to 8 percent.
D)inflation rate goes from 8 percent to 14 percent.

Question 29

Which economist(s)first identified an inverse relationship between inflation and unemployment?

A)Robert Lucas and Thomas Sargent.
B)W. Phillips.
C)Robert Barro.
D)Paul Samuelson.
E)Arthur Laffer.

Question 30

The long-run Phillips curve:

A)is horizontal.
B)is the same as the short-run Phillips curve.
C)displays a positive relationship rather than an inverse relationship.
D)is exponential.
E)is vertical.

Question 31

Which of the following statements is true ?

A)The Phillips curve has always been stable.
B)If the Phillips curve shifts outward to the right this illustrates a greater tradeoff between unemployment and inflation.
C)Keynesian economics assumes a vertical Phillips curve.
D)According to the natural rate hypothesis the Phillips curve is downward sloping.
E)All of these.

Question 32

The long-run Phillips curve:

A)is downward sloping.
B)is upward sloping.
C)shows there is no tradeoff between unemployment and inflation.
D)is horizontal at the natural rate of inflation.

Question 33

The Phillips curve traces a set of combinations of rates of:

A)interest and unemployment.
B)real GDP and inflation.
C)real GDP and interest.
D)inflation and interest.
E)unemployment and inflation.

Question 34

The natural rate hypothesis argues that the economy will:

A)self-correct to the natural rate of inflation.
B)require expansionary fiscal policy to reach the natural rate of unemployment.
C)self-correct to the natural rate of unemployment.
D)require expansionary monetary policy to reach the natural rate of unemployment.

Question 35

A graph showing the inverse relationship between the economy's rate of unemployment and rate of inflation is called the:

A)Laffer curve.
B)aggregate expenditure model.
C)Keynesian cross.
D)Phillips curve.
E)consumption curve.

Question 36

Exhibit 17-1 Inflation and unemployment rates In Exhibit 17-1, when the unemployment rate goes from 3 percent to 9 percent,

A)the level of inflation is unaffected.
B)the inflation rate goes from 8 percent to 14 percent.
C)the inflation rate goes from 8 percent to 3 percent.
D)the inflation rate goes to 0 percent.
E)deflation occurs.

Question 37

The Phillips Curve shows the trade-off between:

A)unemployment and output.
B)inflation and output.
C)unemployment and inflation.
D)imports and exports.
E)unemployment and imports.

Question 38

Incorporation of expectations into economic decision making indicates that in the long run:

A)inflation relates directly to unemployment.
B)inflation is inversely related to unemployment.
C)the Phillips curve is vertical at the natural rate of unemployment.
D)high unemployment is a primary cause of inflation.

Question 39

The relationship between inflation and unemployment shown along a Phillips curve is a(n):

A)direct relationship.
B)quadratic relationship.
C)exponential relationship.
D)inverse relationship.
E)parabolic relationship.

Question 40

Many economists argue that, in the long run, the economy self-corrects and achieves full employment. This argument is known as the:

A)natural rate hypothesis.
B)incomes policy approach.
C)political business cycle theory.
D)Keynesian cross model.

Question 41

The political business cycle refers to the possibility that:

A)incumbent politicians will be reelected regardless of the state of the economy.
B)politicians will manipulate the economy to enhance their chances of being reelected.
C)there are more recessions prior to elections.
D)recessions coincide with election years.

Question 42

Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?

A)In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B)In the short run, the unemployment rate will decrease, but in the long run, it will self correct to the natural rate of unemployment.
C)There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D)In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question 43

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

A)A higher general level of prices but no change in real output
B)A higher general level of prices and an expansion in real output
C)No change in the general level of prices and a reduction in real output
D)No change in either the general level of prices or real output

Question 44

The adaptive expectations hypothesis implies that people:

A)adjust their expectations quickly to policy changes.
B)expect the next period to be pretty much like the recent past.
C)will always be correct in their forecast for the next period.
D)change their expectations about the future if policy changes.

Question 45

The hypothesis that people believe the best indicator of the future is the recent past is known as:

A)rational expectations.
B)adaptive expectations.
C)lagged expectations.
D)trend expectations.

Question 46

According to adaptive expectations theory, which of the following would be the result of expansionary monetary and fiscal policies?

A)The economy self-corrects to the natural rate of unemployment.
B)There is no long-run trade off between inflation and unemployment.
C)The inflation rate rises.
D)All of these.

Question 47

Under adaptive expectations theory, an increase in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

A)increases; increases
B)increases; decreases
C)increases; does not change
D)decreases; increases

Question 48

Under the natural rate hypothesis, expansionary monetary and fiscal policies can at best produce a:

A)permanent change in the long-run Phillips curve.
B)short-run change in the unemployment rate.
C)long-run change in the unemployment rate.
D)permanent change in the unemployment rate.

Question 49

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a:

A)temporary reduction in the unemployment rate.
B)permanent reduction in the unemployment rate.
C)temporary reduction in the inflation rate.
D)permanent reduction in the inflation rate.

Question 50

According to adaptive expectations theory, which of the following would be the result of expansionary monetary and fiscal policies?

A)There is a short-run reduction in unemployment.
B)There is a long-run trade off between inflation and unemployment.
C)The inflation rate falls in the long run.
D)The economy always operates at the natural rate of unemployment

Question 51

Under adaptive expectations theory, people expect the rate of inflation this year to be:

A)zero, regardless of the rate last year.
B)the same as last year.
C)the rate based on predictable and fiscal policies.
D)All of these.

Question 52

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the:

A)rational expectations hypothesis.
B)adaptive expectations hypothesis.
C)permanent income theory.
D)recognition lag.

Question 53

Under adaptive expectations theory, people persistently:

A)underestimate inflation when it is slowing down.
B)overestimate inflation when it is accelerating.
C)underestimate inflation when it is accelerating.
D)adapt to the prevailing inflation rate.

Question 54

When people use recent information to gradually adjust their forecasts of inflation, they are said to have:

A)static expectations.
B)adaptive expectations.
C)rational expectations.
D)spiraling expectations.

Question 55

The proponents of adaptive expectations believe that:

A)there will be a substantial time lag before people anticipate the effects of a shift to a more expansionary macro-policy.
B)macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C)discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
D)all of these are true.

Question 56

According to adaptive expectations theory, expansionary monetary and fiscal policies to reduce the unemployment rate are:

A)useless in the long run.
B)useless in the short run.
C)ineffective on the price level.
D)None of these.

Question 57

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy)is called:

A)the adaptive expectations hypothesis.
B)the permanent income hypothesis.
C)the rational expectations hypothesis.
D)the Phillips curve.

Question 58

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 59

Which of the following best describes the idea of a political business cycle?

A)Politicians have a bias to cut taxes and increase government spending.
B)Special interests result in alternating federal deficits.
C)Politicians will use fiscal and monetary policy to cause output, real incomes, and employment to be rising prior to elections.
D)Good intentions of politicians influence the business cycle.

Question 60

The natural rate hypothesis implies that the long-run Phillips curve will be:

A)downward-sloping.
B)upward-sloping.
C)vertical.
D)horizontal.

Question 61

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

A)Recent events and data.
B)Keynesian and monetarist models.
C)Forecasts by public-and private-sector economists.
D)All the relevant information that is available.

Question 62

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?

A)The monetarist model.
B)The Keynesian model.
C)The supply-side model.
D)The rational expectations model.

Question 63

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

A)ignore the policy until it exerts an observable impact on prices, output, and employment.
B)quickly take steps to adjust their decision making in light of the more expansionary policies.
C)be fooled at the outset but eventually adjust their decision making in accordance with the change in policy.
D)be unaware that this policy change has been implemented until a higher rate of inflation is observed.

Question 64

The rational expectations hypothesis indicates that people:

A)pay little attention to policy when forming their expectations about the future.
B)expect the next period to be pretty much like the recent past, regardless of policy changes.
C)will always be able to forecast the future accurately.
D)change their expectations about the future if policy changes.

Question 65

The hypothesis that people use all available information to predict the future is known as:

A)rational expectations.
B)adaptive expectations.
C)lagged expectations.
D)trend expectations.

Question 66

The rational expectations theory indicates that expansionary policy will:

A)stimulate real output in the long run but not in the short run.
B)expand real output and employment if the public quickly anticipates the effects of the expansionary policy.
C)equalize real and nominal interest rates during lengthy periods of inflation.
D)fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Question 67

The proponents of rational expectations believe that:

A)there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B)macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment.
C)the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal.
D)discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question 68

According to the theory of rational expectations,

A)workers' experience tells them that government action to lower unemployment will not affect inflation.
B)consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
C)policy goals can be achieved easily in the short run.
D)workers' wage demands include anticipated inflation.
E)expansionary monetary policy will lead to permanent interest rate declines.

Question 69

According to rational expectations theory, which of the following is the best approach to lower the inflation rate?

A)Preannounced stable government policies.
B)Unpredictable government policies.
C)First predictable and then unpredictable government policies.
D)None of these.

Question 70

This school of thought argues that because people anticipate the consequences of announced government policy and incorporate these anticipated consequences into their present decision making, people end up undermining the government policy. What is it?

A)Neo-Keynesian.
B)Keynesian.
C)Monetarist.
D)Supply-side.
E)Rational expectations.

Question 71

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

A)the same as last year.
B)zero, regardless of the rate last year.
C)the rate based on predictable monetary and fiscal policies.
D)All of these.

Question 72

Which of the following groups believes that government policy is undermined by people's incorporation of the anticipated consequences of the policy into their present decisions?

A)Classical school.
B)Keynesian school.
C)Neo-Keynesian school.
D)Rational expectations school.
E)Supply-side school.

Question 73

The belief that the government can do absolutely nothing in either the short run or the long run to reduce the unemployment rate, because people will anticipate the government's actions, is held by the:

A)rational expectations school.
B)neo-Keynesian school.
C)classical school.
D)supply-side school.
E)Keynesian school.

Question 74

According to rational expectations theory,

A)there is absolutely nothing government can do, even in the short run, to reduce the economy's unemployment rate.
B)the government can use fiscal policy such as increased government spending or lower tax rates to reduce unemployment.
C)a modern extension of Keynesian economics exists.
D)discretionary fiscal policy is essential for prolonged growth.
E)market participants can be fooled in the long run by monetary and fiscal policy rules.

Question 75

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

A)prices but not real output in the short run.
B)real output but not prices in the short run.
C)real output in the long run but not in the short run.
D)real output in both the long run and the short run.

Question 76

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move:

A)directly from 100 to 110 and then remain at 110.
B)directly from 100 to 105 and then remain at 105.
C)from 100 to 105 initially and then eventually move back to 100.
D)from 100 to 105 initially and then eventually move to 110.

Question 77

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

A)desirable because the result is to lower inflation.
B)harmful because the only result is higher inflation.
C)ineffective on the price level.
D)None of these.

Question 78

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move:

A)directly from E₁ to E₃ and then remain at E₃.
B)directly from E₁ to E₂ and then remain at E₂.
C)from E₁ to E₂ initially and then eventually move back to E₁.
D)from E₁ to E₂ initially and then eventually move to E₃.

Question 79

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

A)Keynesian theory.
B)rational expectations theory.
C)incomes policy.
D)supply-side theory.

Question 80

The rational expectations hypothesis implies that discretionary macro-policy will:

A)be ineffective, even in the short run.
B)be effective in the short run but ineffective in the long run.
C)be effective both in the short run and long run.
D)make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.