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 Phillips Curve is given by $$\pi_t \approx \pi_t^e - \alpha u_t + m + z. If $$the central bank wants to reduce inflation, what is the likely short-run consequence for unemployment?

Accepted Answer

Unemployment will increase.

Question 3

In the 1970s, the United States experienced a large increase in oil prices. According to the Phillips Curve framework, what is the effect of such a 'cost-push' shock?

Accepted Answer

It shifts the Phillips Curve upward.

Question 4

Given the log-linearized Phillips Curve $$\pi_t \approx \pi_t^e - \alpha u_t + m + z$$, what does the parameter $$\alpha$$ represent?

Accepted Answer

The sensitivity of inflation to changes in unemployment.

Question 5

If expected inflation is anchored at 2% and the natural rate of unemployment is 5%, what happens to actual inflation if unemployment falls to 3%, according to $$\pi_t - \bar{\pi} = -\alpha (u_t - u_n)$$?

Accepted Answer

Actual inflation rises above 2%.

Question 6

Which of the following is a plausible reason for the Phillips Curve to shift upward?

Accepted Answer

An increase in expected inflation $$\pi_t^e.$$

Question 7

Suppose the Phillips Curve is estimated as $$\Delta \pi_t = -\alpha u_t + m + z. If $$the regression finds $$\alpha is $$not statistically significant, what does this imply?

Accepted Answer

There is no relationship between unemployment and the change in inflation.

Question 8

If the central bank loses credibility and inflation expectations become unanchored, which of the following is most likely to occur?

Accepted Answer

Inflation expectations adjust rapidly to past inflation, making inflation more volatile.

Question 9

Given the equation for the natural rate of unemployment $$u_n = \frac{m + z}{\alpha}$$, which of the following would decrease the natural rate?

Accepted Answer

A decrease in worker bargaining power $$z.$$

Question 10

During the period 1996 to 2019, the Federal Reserve successfully anchored inflation expectations at 2%. According to the Phillips Curve, what is the expected relationship between unemployment and inflation during this period?

Accepted Answer

A strong negative relationship.

Question 11

If $$\pi_t = \pi_t^e - \alpha u_t + m + z$$ and $$m$$ increases due to a rise in non-labor costs, what happens to inflation at the natural rate of unemployment?

Accepted Answer

Inflation increases.

Question 12

Which of the following best explains why the Phillips Curve appeared to break down after the 1960s?

Accepted Answer

Inflation expectations became unanchored and adapted to past inflation.

Question 13

Suppose survey data and market data both indicate that expected inflation is 3%. If the unemployment rate is at its natural rate, what does the Phillips Curve predict about actual inflation?

Accepted Answer

Actual inflation will be equal to 3%.

Question 14

If the Phillips Curve is $$\pi_t = \pi_t^e - \alpha u_t + m + z$$ and $$z$$ increases due to stronger labor unions, what is the likely effect on inflation?

Accepted Answer

Inflation increases.

Question 15

Which of the following is a valid method for measuring expected inflation in practice?

Accepted Answer

Surveying professional forecasters.

Question 16

If $$\pi_t^e = \pi_{t-1}$$, what does this assumption imply about how people form expectations?

Accepted Answer

Expectations are adaptive, based on past inflation.

Question 17

Suppose the Phillips Curve is $$\pi_t - \pi_t^e = -\alpha (u_t - u_n). If$$ $$u_t \u003e u_n$$, what does this imply about inflation relative to expected inflation?

Accepted Answer

Inflation is lower than expected inflation.

Question 18

Which of the following scenarios would most likely cause a wage-price spiral according to the Phillips Curve framework?

Accepted Answer

A sustained increase in expected inflation.

Question 19

If the central bank wants to keep inflation stable at its target, what must be true about the unemployment rate according to the Phillips Curve?

Accepted Answer

Unemployment must be at the natural rate.

Question 20

Given the Phillips Curve $$\pi_t = \pi_t^e - \alpha u_t + m + z$$, which of the following would NOT shift the curve upward?

Accepted Answer

A decrease in worker bargaining power $$z.$$

The Phillips Curve: Inflation, Unemployment, and Expectations

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