Question 1

According to the original Phillips curve observed in the 1960s, what was the relationship between unemployment and inflation in the United States?

Accepted Answer

A negative relationship: higher unemployment was associated with lower inflation.

Question 2

Which of the following best explains why the Phillips curve relationship broke down in the 1970s?

Accepted Answer

Both expected inflation and the natural rate of unemployment became more variable, and supply shocks like oil price increases occurred.

Question 3

The expectations-augmented Phillips curve can be expressed as $$\pi = \pi^e - h(u - u^n). If $$actual inflation equals expected inflation, what is true about the unemployment rate?

Accepted Answer

Unemployment equals the natural rate.

Question 4

Suppose the central bank unexpectedly increases the money supply by more than anticipated. According to the expectations-augmented Phillips curve, what is the likely short-run effect?

Accepted Answer

Inflation will rise and unemployment will fall below the natural rate.

Question 5

Which of the following would cause the short-run Phillips curve to shift upward?

Accepted Answer

An increase in expected inflation.

Question 6

A supply shock, such as a sudden increase in oil prices, is likely to have what effect on the short-run Phillips curve?

Accepted Answer

Shift it upward and to the right.

Question 7

According to Okun's Law, if the full-employment output is $$20$$ trillion and cyclical unemployment rises by $$2$$ percentage points for one year, what is the estimated loss in output?

Accepted Answer

$$800$$ billion

Question 8

Which of the following is NOT a cost of perfectly anticipated inflation?

Accepted Answer

Unexpected redistribution of wealth between borrowers and lenders.

Question 9

If actual inflation is higher than expected inflation, who benefits and who loses?

Accepted Answer

Borrowers benefit, lenders lose.

Question 10

Why might central banks target an inflation rate of around $$2\%$$ rather than $$0\%$$?

Accepted Answer

Because $$2\%$$ inflation keeps the costs of inflation low and reduces the risk of deflation.

Question 11

Which of the following best describes the Lucas critique in the context of the Phillips curve?

Accepted Answer

People's behavior changes when policy rules change, so past relationships may not predict future outcomes.

Question 12

What is the long-run Phillips curve according to both Keynesian and classical models?

Accepted Answer

Vertical at the natural rate of unemployment.

Question 13

Suppose a country experiences hyperinflation. Which of the following is NOT a typical consequence?

Accepted Answer

The real value of money increases, encouraging saving.

Question 14

If the nominal interest rate is $$0\%$$ and the inflation rate is $$-2\% ($$deflation), what is the real interest rate?

Accepted Answer

$$2\%$$

Question 15

Which of the following is a reason why the costs of unemployment may be underestimated if only output loss is considered?

Accepted Answer

Unemployment imposes psychological and long-term earnings costs on workers.

Question 16

What is the 'sacrifice ratio' in the context of disinflation?

Accepted Answer

The number of percentage points of output lost to reduce inflation by one percentage point.

Question 17

Which policy is most likely to reduce the costs of disinflation according to the classical view?

Accepted Answer

A rapid and credible reduction in money growth ('cold turkey').

Question 18

Why might wage and price controls fail to permanently reduce inflation?

Accepted Answer

Once controls are lifted, prices tend to return to their previous trajectory if monetary policy remains expansionary.

Question 19

Which of the following is a key factor in reducing the costs of disinflation, according to the study materials?

Accepted Answer

The credibility and reputation of the central bank in committing to low inflation.

Question 20

If policymakers are uncertain about the true natural rate of unemployment, what is a recommended approach?

Accepted Answer

Be less aggressive with policy to avoid the risk of rising inflation due to misestimation.

Unemployment and Inflation: The Phillips Curve and Macroeconomic Policy

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