Question 1

Which of the following best describes the relationship depicted by the Phillips Curve in its original form?

Accepted Answer

A negative relationship between inflation and unemployment.

Question 2

Suppose the expected inflation rate $$\pi^e_t$$ increases while the unemployment rate $$u_t$$ remains at the natural rate $$u_n. $$According to the Phillips Curve, what happens to the actual inflation rate $$\pi_t$$?

Accepted Answer

It increases to match the new expected inflation rate.

Question 3

What is the main implication of a persistent positive output gap ($$Y \u003e Y_n) in $$the IS-LM-PC model?

Accepted Answer

The inflation rate will rise above the expected rate.

Question 4

If the central bank raises the nominal interest rate in response to a supply shock that increases inflation, what is the likely short-term effect on output and inflation?

Accepted Answer

Output falls and inflation eventually falls.

Question 5

Which of the following scenarios is most likely to result in a wage-price spiral?

Accepted Answer

Inflation expectations adjust rapidly to past inflation.

Question 6

Given the equation $$\pi_t = \pi^e_t - \alpha (u_t - u_n)$$, what happens to inflation if $$u_t \u003c u_n$$ and expectations are adaptive?

Accepted Answer

Inflation will increase above expected inflation.

Question 7

During the 2022–2023 period in the Euro area, actual inflation was much higher than predicted by the traditional Phillips Curve. What was the primary cause?

Accepted Answer

A series of supply shocks, especially in energy and food prices.

Question 8

Why did the inflation episode after the Covid-19 pandemic not result in a wage-price spiral, according to the study materials?

Accepted Answer

Long-term inflation expectations remained anchored.

Question 9

In the IS-LM-PC model, what is the effect of a permanent increase in the price of oil on the natural rate of unemployment and potential output?

Accepted Answer

The natural rate of unemployment rises and potential output falls.

Question 10

Suppose the central bank does not respond to a temporary supply shock that raises inflation. What is the likely medium-term outcome if inflation expectations remain anchored?

Accepted Answer

Inflation returns to target once the shock dissipates.

Question 11

Which of the following best explains why deflation was limited during the Great Depression and the 2008 financial crisis, despite high unemployment?

Accepted Answer

Workers were unwilling to accept nominal wage cuts.

Question 12

If the parameter $$	heta in $$the expectations-augmented Phillips Curve increases from 0 to 1, what does this imply about the formation of inflation expectations?

Accepted Answer

Expectations are based solely on last year's inflation.

Question 13

Which of the following is a likely consequence of stagflation caused by a supply shock, such as a sharp increase in oil prices?

Accepted Answer

Rising inflation and falling output.

Question 14

In the IS-LM-PC model, what is the role of the natural real interest rate ($$r_n$$)?

Accepted Answer

It is the interest rate at which output equals potential output.

Question 15

Which of the following best describes the effect of anchored inflation expectations on the Phillips Curve?

Accepted Answer

The Phillips Curve is stable and does not shift with temporary shocks.

Question 16

A country experiences a series of supply shocks that temporarily raise inflation. If the central bank's credibility is high and expectations are anchored, what is the most likely long-term outcome?

Accepted Answer

A temporary increase in inflation followed by a return to target.

Question 17

Which of the following is NOT a reason why the Phillips Curve relationship may weaken during periods of deflation?

Accepted Answer

Firms automatically index wages to inflation.

Question 18

If the output gap is negative ($$Y \u003c Y_n) $$and the central bank keeps the real interest rate above the natural rate, what is the likely effect on inflation?

Accepted Answer

Inflation will fall below the expected rate.

Question 19

Which of the following best describes the main difference between short-run and medium-run effects of a supply shock in the IS-LM-PC model?

Accepted Answer

In the short run, inflation rises and output may fall; in the medium run, output returns to potential and inflation stabilizes.

Phillips Curve and IS-LM-PC Model: Inflation, Unemployment, and Macroeconomic Shocks

Study Guide - Practice Questions

Study Guide - Flashcards