Deck 8: The Phillips Curve, the Natural Rate of Unemployment and Inflation

Question 1

Assume that individuals form expectations of inflation according to : n e = 8nt- 1. From 1970 on,the value of 8 for this equation:

A) decreased over time and approached zero.
B) became negative.
C) increased over time and approached 1.
D) remained constant at zero.
E) remained constant at negative one.

Answer 1

increased over time and approached 1.

Question 2

Hysteresis in the labour market refers to:

A) the volatile relationship between actual unemployment and its natural rate.
B) an increase in actual unemployment translates into no effect on the natural rate of unemployment.
C) an increase in actual unemployment translates into an increase in the natural rate of unemployment.
D) the lack of relationship between actual unemployment and its natural rate.
E) an increase in actual unemployment translates into a decrease in the natural rate of unemployment.

Answer 2

an increase in actual unemployment translates into an increase in the natural rate of unemployment.

Question 3

Data for which country were first used to illustrate the relationship between unemployment and inflation (i.e., the original Phillips curve)?

A) Canada.
B) United States.
C) France.
D) United Kingdom.
E) Australia.

Answer 3

United Kingdom.

Question 4

A permanent increase in nominal money growth will, in the medium run, cause which of the following?

A) An increase in the actual growth rate of output.
B) An increase in the natural level of output.
C) An increase in the growth rate of output.
D) An increase in the inflation rate.
E) An increase in the natural rate of unemployment.

Question 5

Assume that expected inflation is based on u e = 8nt- 1. An increase in 8 will cause:

A) an increase in the natural rate of unemployment.
B) inflation in period t to be more responsive to changes in unemployment in period t.
C) a decrease in the natural rate of unemployment.
D) inflation in period t to be less responsive to changes in unemployment in period t.
E) no change in the natural rate of unemployment.

Question 6

As of 2012, when was the last year that Australia experienced deflation?

A) 2003.
B) 1973.
C) 1933.
D) 1993.
E) 1955.

Question 7

One explanation for the higher natural rate of unemployment in Europe than in Australia is that:

A) the average worker enjoys higher employment protection in Europe.
B) the labour force is defined differently in Europe.
C) the average worker lives with several family members in Europe.
D) the average worker is much older in Europe.
E) unemployment is defined differently in Europe.

Question 8

Suppose the Phillips curve is represented by nt - nt- 1 = 20 - 2ut. Given this information, we know that the natural rate of unemployment in this economy is:

A) 12%.
B) 8%.
C) 10%.
D) 4%.
E) 6%.

Question 9

Suppose the Phillips curve is represented by nt - nt- 1 = 20 - 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%?

A) The rate of inflation will tend to increase.
B) The price level will tend to increase.
C) The price level will tend to decrease.
D) The rate of inflation will be constant.
E) The rate of inflation will tend to decrease.

Question 10

Which of the following statements will likely be correct when inflation has been persistent?

A) Higher unemployment rates will be associated with lower inflation rates.
B) Workers and firms ignore past inflation.
C) The current inflation rate will not depend heavily on past inflation.
D) Lower unemployment rates will be associated with higher inflation rates.
E) The expected inflation rate for a given year will equal the previous year's actual inflation rate.

Question 11

Which of the following will tend to occur when a high proportion of a country's workers have indexed wages?

A) The unemployment rate will be relatively high.
B) The unemployment rate will be relatively low.
C) The inflation rate will be relatively low.
D) A given change in the unemployment rate will cause a larger change in the inflation rate.
E) A given change in the unemployment rate will cause a smaller change in the inflation rate.

Question 12

In which of the following decades did the Phillips curve break down for Australia?

A) 1980s.
B) 1960s.
C) 1970s.
D) 1940s.
E) 1950s.

Question 13

t Assume that expected inflation is based on n e = 8nt- 1. If 8 = 1, we know that:

A) an increase in the unemployment rate will have no effect on inflation.
B) a decrease in the unemployment rate will have no effect on inflation.
C) the actual unemployment rate will not deviate from the natural rate of unemployment.
D) low rates of unemployment will cause steadily increasing rates of inflation.
E) the Phillips curve illustrates the relationship between the level of the inflation rate and the level of the unemployment rate.

Question 14

Which of the following individuals first discovered the relationship between unemployment and inflation for the United States?

A) Solow and Friedman.
B) Friedman and Phelps.
C) Friedman and Phillips.
D) Samuelson and Solow.
E) Phillips and Ricardo.

Question 15

Suppose policymakers underestimate the natural rate of unemployment. In a situation like this, policymakers might implement a policy that:

A) results in deflation.
B) attempts to maintain output below the natural level of output.
C) results in steadily decreasing inflation.
D) attempts to maintain output at the natural level of output.
E) results in steadily increasing inflation.

Question 16

The "Lucas critique" is that:

A) macro data based on government surveys is inaccurate.
B) increasing unemployment to reduce inflation is more costly to society than economists traditionally think.
C) policy changes affect expectations, which in turn affect the impact of the policy.
D) policy changes can affect the economy only when they are expected.
E) in the medium run, output always returns to its natural level.

Question 17

Which of the following assumptions best characterised the assumption about how individuals formed expectations of inflation by the early 1970s?

A) Expected inflation for the current year equal to the average inflation rate over the past five years.
B) Expected inflation for the current year approximately equal to last year's inflation rate.
C) Expected inflation for the current year equal to the average inflation rate over the past ten years.
D) Expected inflation for the current year larger than last year's inflation rate.
E) Expected inflation for the current year smaller than last year's inflation rate.

Question 18

As the proportion of labour contracts that index wages to prices declines, we would expect that:

A) nominal wages will become more sensitive to changes in unemployment.
B) an increase in the unemployment rate will now have a smaller effect on inflation.
C) the natural rate of unemployment will decrease.
D) the natural rate of unemployment will increase.
E) an increase in the unemployment rate will now have a larger effect on inflation.

Question 19

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut . Which of the following will not cause an increase in the natural rate of unemployment?

A) A decrease in a.
B) Expansionary monetary policy.
C) An increase in m.
D) A decrease in z.
E) Expansionary fiscal policy.

Question 20

Analysis of the Australian experience in reducing the inflation rate in the late 1980s suggests which of the following?

A) Inflation can be reduced without a recession.
B) Credibility plays no role in the macroeconomic effects of a disinflation policy.
C) The disinflation process was consistent with the Phillips curve prediction.
D) All of the above.
E) None of the above.

Question 21

In the Phillips curve equation, which of the following will not cause an increase in the current inflation rate?

A) An increase in the markup.
B) An increase in the expected inflation rate.
C) A decrease in the minimum wage.
D) A decrease in the unemployment rate.
E) An increase in unemployment benefits.

Question 22

A disinflation refers to a situation where:

A) the unemployment rate is falling.
B) the inflation rate is negative.
C) the inflation rate is falling.
D) the inflation rate is constant.
E) both inflation and the unemployment rate are increasing.

Question 23

Use the following Phillips curve equation to answer this question: nt - nt- 1 = (m + z) - aut. Which of the following will cause a decrease in the natural rate of unemployment?

A) A decrease in m.
B) A decrease in expected inflation.
C) An increase in z.
D) A decrease in actual inflation.
E) A decrease in a.

Question 24

Which of the following is the essential ingredient of successful disinflation according to Sargent?

A) Credibility of trade policy.
B) Credibility of fiscal policy.
C) Credibility of labour market policy.
D) Credibility of monetary policy.
E) Credibility of exchange rate policy.

Question 25

Which of the following is one possible explanation for the change in the natural rate of unemployment in Australia during the 1990s?

A) Contractionary fiscal policy.
B) Increased globalisation and stronger competition.
C) A decrease in benefits paid to workers by firms.
D) Contractionary monetary policy.
E) An increase in the proportion of labour contracts that were indexed.

Question 26

Who first used UK data to identify a negative relationship between unemployment and inflation?

A) Samuelson.
B) Phillips.
C) Keynes.
D) Solow.
E) Friedman.

Question 27

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut. Which of the following will cause an increase in the natural rate of unemployment?

A) An increase in expected inflation.
B) An increase in actual inflation.
C) A decrease in z.
D) An increase in m.
E) An increase in a.

Question 28

Which of the following has exhibited the most stable relationship over the past four decades in Australia?

A) The unemployment rate and the change in the rate of inflation.
B) The change in the unemployment rate and the change in the rate of inflation.
C) The rate of inflation and the change in the unemployment rate.
D) The inverse of the unemployment rate and the rate of inflation.
E) The unemployment rate and the rate of inflation.

Question 29

In the medium run, an increase in the target rate of inflation will cause:

A) an increase in the rate of inflation.
B) a decrease in the size of the sacrifice ratio.
C) an increase in nominal money growth.
D) an increase in the size of the sacrifice ratio.
E) both A and C.

Question 30

Suppose policy makers underestimate the natural rate of unemployment. In such situations, policy makers will likely implement policies that result in:

A) a steadily decreasing inflation rate.
B) overly restrictive monetary and fiscal policy.
C) more unemployment than necessary.
D) a higher inflation rate than necessary.
E) an unemployment rate that is "too high".

Question 31

Which of the following will cause an increase in the natural rate of unemployment?

A) A decrease in a.
B) A decrease in the expected inflation rate.
C) A decrease in z.
D) A decrease in m.
E) An increase in actual unemployment.

Question 32

If a country experiences persistently low inflation, which of the following tends not to occur?

A) Nominal wages will be set for shorter periods of time.
B) Workers are resistant to decreases in the nominal wage.
C) Wage indexation will become less important.
D) The Phillips curve relation becomes weaker.
E) The markup over labour costs will decrease.

Question 33

For 1970- 2011, the evidence for Australia suggests that the average rate of unemployment required to keep inflation constant has been:

A) between 6% and 7%.
B) between 3% and 4%.
C) between 2% and 3%.
D) between 4% and 5%.
E) between 5% and 6%.

Question 34

Which of the following individuals is responsible for the phrase, "inflation is always and everywhere a monetary phenomenon"?

A) Friedman.
B) Taylor.
C) Sargent.
D) Ball.
E) Phillips.

Question 35

In which of the following periods was the relationship between the Australian unemployment rate and the Australian inflation rate unstable?

A) 1911 to 1919.
B) 1901 to 1909.
C) 1941 to 1949.
D) 1931 to 1939.
E) 1921 to 1929.

Question 36

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut. An increase in the unemployment rate will cause:

A) an increase in the markup over labour costs.
B) an increase in the inflation rate over time.
C) a decrease in the markup over labour costs.
D) a decrease in the inflation rate over time.
E) an increase in expected inflation.

Question 37

An increase in the price of oil will likely cause which of the following?

A) Increase the natural rate of unemployment.
B) Increase the sum "m + z" in the Phillips curve equation.
C) Increase the markup in the Phillips curve equation.
D) Decrease the natural level of output.
E) All of the above.

Question 38

When inflation has been persistent, high unemployment rates will likely be associated with:

A) low but stable rates of inflation.
B) high but stable rates of inflation.
C) low natural rates of unemployment.
D) decreases in the inflation rate.
E) high natural rates of unemployment.

Question 39

During the Great Depression, the actual unemployment rate in Australia , and the natural rate apparently .

A) increased; increased
B) increased; decreased
C) increased; remained unchanged
D) decreased; increased
E) decreased; remained unchanged

Question 40

The original Phillips curve implied or assumed that:

A) the actual and expected rates of inflation would always be unequal.
B) a lower rate of unemployment causes a decreasing rate of inflation.
C) the expected inflation rate is equal to last year's inflation rate.
D) the markup over labour costs was zero.
E) the expected rate of inflation would be zero.

Question 41

Explain how the unexpectedly high rate of productivity growth at the end of the 1990s affected inflation and unemployment during this period.

Question 42

When a worker's nominal wage is indexed, the nominal wage is usually automatically adjusted based on movements in which of the following variables?

A) The average wage in the country.
B) The average wage in the industry.
C) The price of the firm's product.
D) The price level.
E) Productivity.

Question 43

Assume that the Phillips curve equation is represented by nt - nt- 1 = (m + z) - aut. Given this information, the natural rate of unemployment will be equal to:

A) (m + z)/a.
B) m + z.
C) (m + z) - a.
D) (m - z)/a.
E) a(m + z).

Question 44

Which of the following explains why the original Phillips curve relation disappeared or, as some economists have remarked, "broke down" in the 1970s?

A) Monetary policy became contractionary.
B) More labour contracts became indexed to changes in inflation.
C) Individuals assumed that expected inflation would be zero.
D) Individuals changed the way they formed expectations of inflation.
E) Individuals assumed the expected price level for the current year would be equal to the actual price level from the previous year.

Question 45

Which of the following would be most likely to cause a change in the natural rate of unemployment?

A) A change in the price of oil.
B) A change in monetary policy.
C) A change in the rate of inflation.
D) A change in the composition of jobs.
E) A change in fiscal policy.

Question 46

Economists sometimes refer to the neutrality of changes in nominal money growth. This neutrality implies that changes in nominal money growth have no medium- run effect on which of the following?

A) The inflation rate.
B) Output growth.
C) The price level.
D) Nominal money.
E) Nominal wages.

Question 47

Which of the following will increase the inflation rate in the medium run?

A) A permanent increase in the price of oil.
B) A permanent increase in the minimum wage.
C) A permanent increase in target inflation.
D) A large budget deficit.
E) A permanent fall in nominal money growth.

Question 48

Briefly comment on the predictions of economists Milton Friedman and Edmund Phelps about the ability to exploit a tradeoff between inflation and unemployment.

Question 49

Assume that the expected rate of inflation is a function of past inflation and that the unemployment rate has been equal to the natural rate of unemployment for some time. Given this information, we know that:

A) the rate of inflation will approximately be zero.
B) the rate of inflation should be approximately equal to the natural rate of unemployment.
C) the rate of inflation should steadily increase over time.
D) the rate of inflation should steadily decrease over time.
E) the rate of inflation should neither increase nor decrease.

Question 50

Which of the following situations generally exists when deflation occurs?

A) Inflation and unemployment are both decreasing.
B) The price level is decreasing.
C) The rate of inflation is falling.
D) The natural rate of unemployment is zero.
E) Inflation and unemployment are both increasing.

Question 51

The data suggest that in the European Union countries, the natural rate of unemployment:

A) is no longer a relevant concept.
B) has become less "natural", since it is now almost entirely determined by the policies of a few large corporations.
C) has steadily declined over the past three decades.
D) is now higher than its Australian counterpart.
E) will soon exceed the percentage of the labour force that is working.

Question 52

A number of factors are believed to have caused changes in the natural rate of unemployment in Australia during the 1990s. Briefly comment on each of these factors.

Question 53

Based on your understanding of the Phillips curve, is it possible for the unemployment rate to increase while inflation increases? Explain.

Question 54

If the Phillips curve equation is ut - ut- 1 = - (ut - un), which of the following will increase the inflation rate by 8 percentage points?

A) A 1 percentage point decrease in unemployment for 8 years.
B) A 8 percentage point decrease in unemployment for 1 year.
C) A 2 percentage point decrease in unemployment for 4 years.
D) A 4 percentage point decrease in unemployment for 2 years.
E) All of the above.

Question 55

Assume that expected inflation is based on u e = 8nt- 1. If 8 = 0, we know that:

A) low rates of unemployment will cause steadily increasing rates of inflation.
B) high rates of unemployment will cause steadily decreasing rates of inflation.
C) the Phillips curve illustrates the relationship between the level of the inflation rate and the level of the unemployment rate.
D) a decrease in the unemployment rate will have no effect on inflation.
E) an increase in the unemployment rate will have no effect on inflation.

Question 56

One implication of the Lucas critique is that:

A) it takes a long time for a reduction in money growth to reduce the inflation rate.
B) policy changes should be more effective in changing output than econometric studies suggest.
C) unemployment is always at its natural rate in the short run.
D) using a recession to reduce inflation will have disproportionate effects on the poor and disadvantaged.
E) the decrease in inflation might not require any increase in unemployment.

Question 57

Based on the "early incarnation" of the Phillips curve, explain what effect a decrease in the unemployment rate will have on the inflation rate.

Question 58

Based on your understanding of the Phillips curve, explain what happens to actual inflation (relative to expected inflation) when the actual unemployment rate is either above or below the natural rate of unemployment.

Question 59

Explain how the credibility of monetary policy affects how the economy adjusts to a monetary policy action that attempts to reduce the inflation rate.

Question 60

Explain how the original Phillips curve differs from the expectations- augmented Phillips curve (or the modified, or accelerationist Phillips curve).

Question 61

During which decade did the original Phillips curve for Australia break down? Also, briefly explain why the original Phillips curve broke down during this period?

Question 62

Explain the relationship among the following variables in the medium run: (1) output; (2) the natural level of output; (3) nominal money growth; (4) the real money stock; (5) inflation; and (6) the inflation target.

Question 63

Explain what is meant by the "wage- price" spiral.

Question 64

Since 1980, the average unemployment rate in Europe has been significantly higher than the average unemployment in Australia. Explain why this has occurred.

Question 65

Explain what is meant by the Lucas critique and discuss how it can be used to explain the effects of a monetary policy action that attempts to reduce unemployment below the natural rate of unemployment.

Question 66

Given the Phillips curve equation: nt = net + (m + z) - aut. Explain which variable changes would shift the Phillips curve and which variable changes would provide a movement along the Phillips curve.

Question 67

Explain how changes in the proportion of contracts that are indexed affect how a given change in monetary policy will affect economic activity.

Question 68

Explain how a decrease in the proportion of contracts that are indexed affects the relationship between changes in the unemployment rate and inflation.