Deck 11: Aggregate Supply and the Phillips Curve

Question 1

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

Answer 1

all of the above

Question 2

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

Answer 2

all of the above

Question 3

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

Answer 3

influential in efforts to bring the unemployment rate down to low levels

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 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

Question 9

________ 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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

Given the accelerationist Phillips curve △π = - 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
E) none of the above

Question 23

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

Question 24

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

Question 25

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

Question 26

Given the accelerationist Phillips curve △π = - 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

Question 27

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

Question 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

Question 29

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

Question 30

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

Question 31

Based on the data in this table, if the inflation rate in period zero had been 3 percent, then the accelerationist Phillips curve is ________.

A) △π = - 1.8 (U - 7) + ρ
B) △π = - 1.1 (U - 6) + ρ
C) △π = - 0.9 (U - 6) + ρ
D) △π = - 0.4 (U - 9) + ρ
E) none of the above

Question 32

Based on the data in this table, 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

Question 33

________ 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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Given the accelerationist Phillips curve △π = - 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

Question 39

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

Question 40

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

Question 41

Which of the following best approximates Okun's law?

A) a 1 percent increase in output leads to a 2 percent decrease in unemployment
B) a 1 percent increase in output leads to a 1 percent decrease in unemployment
C) a 2 percent increase in output leads to a 4 percent increase in unemployment
D) a 2 percent increase in output leads to a 1 percent decrease in unemployment
E) none of the above

Question 42

According to Okun's law, an increase in which of the following is associated with an increase in unemployment?

A) inflation
B) output
C) expected inflation
D) autonomous expenditure
E) potential output

Question 43

A. W. Phillips' 1958 paper examined unemployment and wage growth. What role, if any, does wage growth play in the modern Phillips curve?

Question 44

In the long run ________.

A) the amount of output an economy can produce is determined by real variables like capital, labor and technological advances
B) aggregate supply is fixed at the potential level of output
C) there is enough time for prices to fully adjust so the classical dichotomy holds
D) all of the above
E) none of the above

Question 45

How do you suppose most people form an expectation of future inflation? Is that method consistent with the assumption of adaptive expectations?

Question 46

According to the short-run aggregate supply curve, if output minus potential output equals zero, then ________.

A) unemployment might be zero
B) inflation might be stable
C) expected inflation must be stable
D) price shocks must be zero
E) none of the above

Question 47

Which of the following shows a negative relationship between the output and unemployment gaps?

A) the AS curve
B) the Phillips curve
C) Okun's law
D) the classical dichotomy
E) none of the above

Question 48

The natural rate of output is ________.

A) independent of the inflation rate
B) always lower than potential output
C) unrelated to the natural rate of unemployment
D) all of the above
E) none of the above

Question 49

Suppose the government lowers unemployment by hiring more government workers. How does it matter whether wages and prices are sticky?

Question 50

Why is there no long-run trade-off between unemployment and inflation?

Question 51

The short-run aggregate supply curve shows that a change in inflation will cause (a) change(s) in ________.

A) output
B) potential output
C) expected inflation
D) price shocks
E) all of the above

Question 52

Which of the following never assumes, either implicitly or explicitly, independence between nominal and real variables?

A) the AS curve
B) the Phillips curve
C) Okun's law
D) the classical dichotomy
E) none of the above

Question 53

The short-run aggregate supply curve shows that inflation will change as a result of changes in ________.

A) output
B) potential output
C) expected inflation
D) price shocks
E) all of the above

Question 54

In the short run ________.

A) inflation is negatively related to the output gap
B) if output rises above its potential level, the unemployment rate falls and firms will lower wages
C) if the labor market tightens, firms will raise prices more rapidly to keep up with upward wage pressures and inflation will ensue
D) all of the above
E) none of the above

Question 55

Based on the data in this table, 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

Question 56

When wages and prices are completely flexible ________.

A) inflation is determined by expected inflation and price shocks
B) labor hoarding occurs
C) unemployment is disconnected from the real economy
D) all of the above
E) none of the above

Question 57

In the long run ________.

A) the aggregate supply is vertical with respect to output
B) the Phillips curve is vertical with respect to unemployment
C) fluctuations in the inflation rate have no impact on output and unemployment
D) all of the above
E) none of the above

Question 58

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?

Question 59

Which of the following is true in regards to Okun's law?

A) employment does not increase commensurately with output rises because firms tend to hoard labor
B) when demand increases, firms tend to work their employees harder and longer
C) it is Okun's prediction of the negative relationship between the output and unemployment gaps that allows the modern Phillips curve to be translated into the AS curve
D) all of the above
E) none of the above

Question 60

In the long run ________.

A) the aggregate supply is vertical with respect to unemployment
B) the Phillips curve is vertical at a given level of expected inflation
C) the economy reaches the potential output level consistent with the natural rate of unemployment
D) all of the above
E) none of the above

Question 61

Aggregate Supply Curves (1)

Based on the graph above, if the economy is at point 2, then (assuming no price shocks and no changes in actual and potential output) the inflation rate next period will be ________ percent.

A) 5
B) 3.5
C) 4.5
D) 4
E) none of the above

Question 62

When a price shock has occurred, inflation returns to its pre-shock rate ________.

A) in the period following the price shock
B) in the period when output has returned to its pre-shock rate
C) once the output gap has returned to zero
D) only in the long run
E) none of the above

Question 63

If Okun's law is U - Un = - 0.5 (Y - YP), and potential output grows at 2% per year, then a recession that causes output to decrease by one percentage point will cause unemployment to increase by ________.

A) 1 percentage point
B) 1.5 percentage points
C) 2 percentage points
D) 3 percentage points
E) one-half percentage point

Question 64

Aggregate Supply Curves (1)

Based on the graph above, the short-run aggregate supply curve is ________.

A) π = 2 + 1.5 (Y - 10) + ρ
B) Y = 8 +
(π) + ρ
C) π = 2 + (Y - 11) + ρ
D) π = 3.5 + 2 (Y - 10) + ρ
E) none of the above

Question 65

________ may cause a shift of the long-run aggregate supply curve.

A) A major earthquake
B) A change in expected inflation
C) A price shock
D) all of the above
E) none of the above

Question 66

Aggregate Supply Curves (1)

Based on the graph above, suppose the economy is at point 2, then output falls to 10 and there is a price shock of one percent. The inflation rate next period will be ________ percent.

A) 5
B) 3.5
C) 4.5
D) 4
E) none of the above

Question 67

If the natural rate of unemployment declines ________.

A) labor is more heavily utilized
B) potential output increases
C) the long run aggregate supply curve shifts to the right
D) all of the above
E) none of the above

Question 68

If the short-run aggregate supply curve is π = πe - 1.2 (Y - YP) + ρ, output equals potential output and there is a price shock of minus two, then the inflation rate is ________.

A) 2
B) πe - 2
C) minus 2
D) minus 2.4
E) none of the above

Question 69

Technological advances lead to ________.

A) a shift of the short run AS curve up
B) a shift of the long run AS curve to the left
C) an upward movement along the long run AS curve
D) all of the above
E) none of the above

Question 70

In the short run ________.

A) the more flexible wages and prices are, the more inflation responds to the output gap
B) the more sticky wages and prices are, the more difficult to tell the difference between the short run and long run aggregate supply curves
C) if wages and prices are sticky, aggregate output is always at its potential level
D) all of the above
E) none of the above

Question 71

If Okun's law is U - Un = - 0.6 (Y - YP), and the Phillips curve is π = πe - 2.5 (U - Un ) + ρ, then the short-run aggregate supply curve is ________.

A) π = πe - 1.5 (Y - YP) + ρ
B) π = πe + 4.2 (Y - YP) + ρ
C) π = πe - 2.5 (Y - YP) + ρ
D) π = πe - 2.5 (Y + YP) + ρ
E) none of the above

Question 72

In 2005 hurricane Katrina devastated large portions of the Gulf Coast economy. Many refineries went offline disrupting oil refining and distribution. What do you think was a likely result?

A) the restricted supply constituted a cost push shock that would have shifted the long run AS curve to the right
B) the restricted supply constituted a cost push shock that would have shifted the short run AS curve to the left
C) the restricted supply constituted a cost push shock that would have meant an upward movement along the Phillips curve
D) all of the above
E) none of the above

Question 73

Suppose the output gap is zero, and policy makers wish to reduce the inflation rate from 10 percent to 5 percent. Which of these policies seems best?

A) contractionary policies to reduce output at least 5 percent below potential output
B) a convincing declaration of the inflation rate target, so that expected inflation falls to 5 percent
C) no policy action; inflation will fall on its own, eventually
D) no policy action; inflation will converge to its long-run rate, regardless of policy
E) price and wage controls to counteract their stickiness

Question 74

If the output gap is constant at minus 2 and the inflation rate has fallen from 6 percent to 5 percent, then next period's short-run aggregate supply curve might be ________.

A) π = 5 - 0.5 (13 - 15)
B) π = 5 + 0.5 (13 - 15)
C) π = 4 + 0.5 (13 - 15)
D) π = 5 + 2 (11 - 15)
E) none of the above

Question 75

Aggregate Supply Curves (1)

Based on the graph above, a cause of movement from point 1 to point 2 might be ________.

A) a positive price shock
B) government policy that lowers unemployment
C) an increase in potential output
D) an increase in expected inflation
E) none of the above

Question 76

If the short-run aggregate supply curve is shifting down repeatedly, it is rather likely that ________.

A) output is declining repeatedly, relative to potential output
B) the long-run aggregate supply curve is shifting to the left
C) negative price shocks are recurring
D) all of the above
E) none of the above

Question 77

Which statement(s) is (are) consistent with a positive relationship between inflation and the output gap?

A) If output rises above its potential level, the unemployment rate falls and firms will raise wages and prices more rapidly.
B) In the short run, the AS curve is upward sloping.
C) Through Okun's law, the negative relationship between the output and unemployment gaps allows the modern Phillips curve to be translated into the AS curve.
D) all of the above
E) none of the above

Question 78

If the Fed were to announce that fighting inflation is not a high priority for the immediate future ________.

A) households might expect higher inflation
B) the short run aggregate supply would shift upwards
C) firms might begin raising their prices to keep up with expected inflation
D) all of the above
E) none of the above

Question 79

In the short run, if current output remains persistently above potential ________.

A) inflation will rise causing a movement along the aggregate supply curve
B) expected inflation will rise causing an upward shift of the aggregate supply curve
C) the aggregate supply curve will shift until current output returns to its potential level
D) all of the above
E) none of the above

Question 80

When a price shock occurs, the inflation rate is affected ________.

A) only in the period of the price shock
B) only in the period after the price shock
C) only if the price shock causes a change in output
D) only if the price shock persists for more than one period
E) none of the above