Deck 31: Phillips Curve

Question 1

If a manager has an expectation of ongoing inflation, this means she believes that:

A)inflation has been negative but will soon turn positive.
B)wages will rise.
C)deflation will occur.
D)cost of inputs will rise.

Answer 1

D

Question 2

If managers have an expectation of ongoing inflation, then it is likely that:

A)prices will not change.
B)prices will rise.
C)prices will fall.
D)the cost of inputs will fall.

Answer 2

B

Question 3

The rate of change of inflation is affected by:
(i) inflation expectations.
(ii) demand.
(iii) the measurement of inflation.
(iv) supply shocks.

A)(i) only
B)(i) and (ii)
C)(i), (ii), and (iv)
D)(ii), (iii), and (iv)

Answer 3

C

Question 4

What is excess demand?

A)too many buyers for too few goods
B)too much supply for too few buyers
C)fast-changing consumer preferences
D)higher equilibrium quantity

Question 5

Excess demand occurs when:

A)there is a surplus in the market.
B)supply is in excess of demand at the market price.
C)demand is in excess of supply at the market price.
D)demand and supply are equal at the market price.

Question 6

Excess demand leads to a:

A)surplus and falling prices.
B)shortage and falling prices.
C)shortage and rising prices.
D)surplus and rising prices.

Question 7

What is insufficient demand?

A)too many buyers for too few goods
B)too much supply for too few buyers
C)slow-changing consumer preferences
D)lower equilibrium quantity

Question 8

Insufficient demand occurs when:

A)there is a shortage in the market.
B)supply is in excess of demand at the market price.
C)demand is in excess of supply at the market price.
D)demand and supply are equal at the market price.

Question 9

Insufficient demand leads to a:

A)surplus and falling prices.
B)shortage and falling prices.
C)shortage and rising prices.
D)surplus and rising prices.

Question 10

Inflation expectations refer to the rate at which:

A)actual inflation exceeds expected inflation.
B)last year's prices rose.
C)current prices are rising.
D)average prices are expected to rise next year.

Question 11

Demand-pull inflation is inflation resulting from:

A)a surplus.
B)excess supply.
C)excess demand.
D)insufficient demand.

Question 12

When the output gap becomes more positive:

A)prices fall due to surpluses.
B)demand-pull inflation rises.
C)unemployment rises.
D)negative supply shocks come about.

Question 13

Consumer confidence in the economy increases greatly, and consumers increase spending significantly. Production does not increase as fast, and prices rise. This scenario describes:

A)cost-push inflation.
B)demand-pull inflation.
C)unanticipated deflation.
D)a negative output gap.

Question 14

In 2008, consumer confidence fell in the United States. This would lead to:

A)cost-push inflation.
B)demand-pull inflation.
C)falling unemployment.
D)insufficient demand.

Question 15

A sudden unexpected situation of stagflation (a situation of high inflation and high unemployment) is evidenced when the labor market Phillips curve:

A)becomes vertical.
B)has a slope of zero.
C)shifts inward.
D)shifts outward.

Question 16

In the United Kingdom, worries about Brexit have caused consumer confidence to fall. Holding everything else equal, this could lead to _____ in the UK economy.

A)excess demand
B)demand-pull inflation
C)insufficient demand
D)a shortage

Question 17

Leading economic pundits predict inflation. Businesses believe these forecasts and raise prices accordingly. This scenario describes:

A)how positive output gaps create inflation.
B)demand-pull inflation.
C)how credible inflation expectations create inflation.
D)a situation where inflation expectations are higher than actual inflation.

Question 18

Cost-push inflation is inflation that arises from an unexpected:

A)rise in production costs.
B)fall in production costs.
C)fall in demand.
D)rise in unemployment.

Question 19

When the U.S. dollar depreciates, this makes foreign goods more expensive. As a result:

A)competitive pressure on U.S. businesses is increased, leading U.S. businesses to lower prices.
B)competitive pressure on U.S. businesses is released, leading some U.S. businesses to raise prices.
C)cost of inputs decrease for U.S. firms that use foreign-made inputs.
D)foreign buyers are now willing to pay less for American-made goods.

Question 20

Suppose aluminum prices rise in international markets. U.S. firms that import aluminum face higher marginal costs and raise prices. This scenario describes:

A)demand-pull inflation.
B)cost-push inflation.
C)a decrease in potential output.
D)a positive supply shock.

Question 21

Suppose rubber prices rise in international markets. For countries that import rubber, this scenario would lead to:

A)cost-push inflation.
B)demand-pull inflation.
C)an increase in potential output.
D)a positive supply shock.

Question 22

A negative supply shock causes:

A)a surplus in consumer markets.
B)demand-pull inflation.
C)a decrease in unexpected inflation.
D)cost-push inflation.

Question 23

If the Canadian dollar appreciates, this makes foreign goods cheaper for Canadians. As a result:

A)competitive pressure on Canadian businesses is increased, leading Canadian businesses to lower prices.
B)competitive pressure on Canadian businesses is released, leading some Canadian businesses to raise prices.
C)cost of inputs increase for Canadian businesses that use foreign-made inputs.
D)foreign buyers are now willing to pay more for Canadian goods.

Question 24

Inflation arises due to:

A)changes in real output, changes in nominal output, and changes in the unemployment rate.
B)inflation expectations, potential output, and the non-accelerating inflation rate of unemployment (NAIRU).
C)inflation expectations, demand-pull inflation, and cost-push inflation.
D)the negative output gap, the positive output gap, and unexpected inflation.

Question 25

When a competitive business sets prices, it takes into account:
(i) marginal costs.
(ii) competitive prices.
(iii) prices from two decades back.
(iv) monopoly prices.

A)(i) only
B)(i) and (ii)
C)(i), (ii), and (iv)
D)(ii) and (iv)

Question 26

The Treasury inflation-protected security (TIPS) is a bond with a principal value that fluctuates relative to changes in the consumer price index. The interest on the bond is calculated on the adjusted principal. This instrument has an advantage over a regular bond because it:

A)has a real return that is zero.
B)protects the saver against inflation.
C)has a return that matches the economic growth rate.
D)protects the saver against supply-side shocks.

Question 27

If managers expect the inflation rate to continue over time, they have _____ expectations.

A)adaptive
B)anchored
C)zero
D)rational

Question 28

If managers expect inflation to approach the Federal Reserve's target, they have _____ expectations.

A)adaptive
B)anchored
C)zero
D)rational

Question 29

If managers use strong macroeconomic knowledge and good forecasts to build their inflation expectations, they have _____ expectations.

A)adaptive
B)anchored
C)aero
D)rational

Question 30

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the highest inflation rate was:

A)Switzerland.
B)Argentina.
C)Turkey.
D)Italy.

Question 31

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the lowest inflation rate was:

A)Japan.
B)Argentina.
C)Turkey.
D)Italy.

Question 32

The figure shows inflation from 2009 to 2018 for countries in the Organization for Economic Cooperation and Development (OECD). The country with the second-highest inflation rate was:

A)Switzerland.
B)Argentina.
C)Russia.
D)Italy.

Question 33

The figure shows inflation expectations for U.S. consumers over time. In which time period did consumers expect the highest inflation rates?

A)late 1990s
B)early 1990s
C)late 1970s
D)early 2000s

Question 34

The figure shows inflation expectations and actual inflation for U.S. consumers over time. Which of the following statements correctly describes the relationship between these rates?

A)Actual inflation and inflation expectations seem to behave independently.
B)Actual inflation and inflation expectations are exactly the same over time.
C)Actual inflation tends to follow inflation expectations.
D)Actual inflation and inflation expectations have an inverse relationship.

Question 35

When output exceeds potential output:
(i) there is excess demand.
(ii) demand-pull inflation occurs.
(iii) the output gap becomes negative.
(iv) the output gap becomes positive.

A)(i) only
B)(ii) and (iv)
C)(iii) only
D)(i), (ii), and (iv)

Question 36

When output is less than potential output:
(i) there is insufficient demand.
(ii) demand-pull inflation occurs.
(iii) the output gap becomes negative.
(iv) the output gap becomes positive.

A)(i) only
B)(ii) and (iv)
C)(i) and (iii)
D)(i), (ii), and (iv)

Question 37

If expected inflation is 3% and actual inflation is 4.2%, then unexpected inflation is:

A)3.0%.
B)4.2%.
C)7.2%.
D)1.2%.

Question 38

If expected inflation is 2%, and actual inflation is 2.8%, then unexpected inflation is:

A)2.8%.
B)2.0%.
C)0.8%.
D)4.8%.

Question 39

If expected inflation is 1.75% and actual inflation is 2.30%, then unexpected inflation is:

A)4.05%.
B)2.30%.
C)1.75%.
D)0.55%.

Question 40

Forecasts expect inflation to be 2%. Actual inflation ends up being 1.75%. Holding all else equal, if there is no supply-side change in the economy, these statistics indicate there is:

A)currency depreciation.
B)excess demand.
C)demand-pull inflation.
D)insufficient demand.

Question 41

Forecasts expect inflation to be 2%. Actual inflation ends up being 1.75%. Holding all else equal, if there is no supply-side change in the economy, these statistics indicate inflation is ____ less than expected.

A)3.75%
B)0.25%
C)1.75%
D)2.0%

Question 42

Why do the unexpected inflation and output gap axes need to extend into the negative regions in the Phillips curve diagram?

A)Both output gaps and unexpected inflation can be negative or positive.
B)Both output gaps and unexpected inflation always begin by being negative.
C)Negative inflation gaps are very common.
D)Negative output gaps are very common.

Question 43

What is measured on the vertical axis on the Phillips curve diagram?

A)the price level
B)unexpected inflation
C)the output gap
D)real GDP

Question 44

What is measured on the horizontal axis on the Phillips curve diagram?

A)unexpected inflation
B)the output gap
C)the price level
D)real GDP

Question 45

The Phillips curve is upward-sloping because:

A)when prices rise, quantity supplied rises.
B)the more positive the output gap, the higher inflation rises above expected inflation.
C)the more positive the output gap, the lower inflation is when compared to expected inflation.
D)higher unemployment is not related to unexpected inflation.

Question 46

Consider the Phillips curve shown here. In region A:

A)inflation falls below expected inflation.
B)inflation rises above expected inflation.
C)there is excess demand.
D)the output gap is positive.

Question 47

Consider the Phillips curve shown here. In region A:

A)inflation equals expected inflation.
B)inflation rises above expected inflation.
C)there is insufficient demand.
D)the output gap is positive.

Question 48

Consider the Phillips curve shown here. In region A:

A)inflation equals expected inflation.
B)inflation rises above expected inflation.
C)there is excess demand.
D)the output gap is negative.

Question 49

Consider the Phillips curve shown here. In region B:

A)inflation equals expected inflation.
B)inflation rises above expected inflation.
C)there is insufficient demand.
D)the output gap is negative.

Question 50

Consider the Phillips curve shown here. In region B:

A)there is excess demand.
B)inflation falls below expected inflation.
C)there is insufficient demand.
D)the output gap is negative.

Question 51

Consider the Phillips curve shown here. In region B:

A)there is insufficient demand.
B)inflation falls below expected inflation.
C)the output gap is positive.
D)the output gap is negative.

Question 52

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. When the output gap is -4%:

A)there is excess demand.
B)inflation rises above expected inflation.
C)the output gap is positive.
D)the output gap is negative.

Question 53

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. When the output gap is 4%:

A)there is insufficient demand.
B)inflation falls below expected inflation.
C)the output gap is positive.
D)the output gap is negative.

Question 54

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. When the output gap is 4%:

A)there is insufficient demand.
B)inflation rises above expected inflation.
C)unexpected inflation is zero.
D)the output gap is negative.

Question 55

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% above potential GDP. What is your forecast for unexpected inflation?

A)1%
B)0%
C)3%
D)-1%

Question 56

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% below potential GDP. What is your forecast for unexpected inflation?

A)1%
B)0%
C)3%
D)-1%

Question 57

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be equal to potential GDP. What is your forecast for unexpected inflation?

A)1%
B)0%
C)3%
D)-1%

Question 58

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% above potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power?

A)3%
B)2%
C)1%
D)4%

Question 59

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be 3% below potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power?

A)3%
B)2%
C)1%
D)4%

Question 60

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be equal to potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power at the current level?

A)3%
B)2%
C)1%
D)4%

Question 61

Historical data for the United States has shown a 5% rise in the output gap to correspond to about _____ increase in unexpected inflation.

A)8%
B)3%
C)1%
D)5%

Question 62

Using the Phillips curve to forecast future inflation involves which two steps?

A)Assess inflation expectations, and then forecast unexpected inflation.
B)Fix inflation expectations, and then calculate the difference from actual inflation.
C)Use adaptive expectations, and then use anchored expectations.
D)Calculate a trend based on past inflation, and then add 2%.

Question 63

High unemployment occurs when:

A)there is insufficient demand.
B)inflation rises above inflation expectations.
C)the output gap is positive.
D)the output gap is equal to zero.

Question 64

High unemployment occurs when:

A)there is excess demand.
B)inflation rises above inflation expectations.
C)the output gap is negative.
D)the output gap is equal to zero.

Question 65

Unemployment will rise when:

A)there is excess demand.
B)inflation falls below inflation expectations.
C)the output gap is positive.
D)the output gap is equal to zero.

Question 66

Which of these choices is correct? Holding all else equal, assuming no supply-side shock, the:

A)lower the unemployment rate, the higher the unexpected inflation.
B)lower the unemployment rate, the lower the unexpected inflation.
C)higher the unemployment rate, the higher the unexpected inflation.
D)more positive the output gap, the higher the unemployment rate.

Question 67

Which of the graphs shows the correct shape of the labor market Phillips curve?

A)

B)

C)

D)

Question 68

When unexpected inflation is zero, the corresponding unemployment rate is the _____ unemployment rate.

A)zero
B)minimum
C)equilibrium
D)maximum

Question 69

When unexpected inflation is zero, the corresponding unemployment rate is the:

A)cyclical unemployment rate.
B)non-accelerating rate of inflation.
C)nonequilibrium unemployment rate.
D)non-accelerating inflation rate of unemployment (NAIRU).

Question 70

When unexpected inflation is zero, the corresponding unemployment rate is not zero because:

A)cyclical unemployment is high and positive.
B)the output gap is negative.
C)the output gap is positive.
D)structural unemployment and frictional unemployment are not zero.

Question 71

When the economy is at potential GDP, the unexpected inflation rate is _____, and the unemployment rate is equal to _____.

A)zero; potential output
B)2%; cyclical
C)zero; the natural rate of unemployment
D)2%; the non-accelerating inflation rate of unemployment (NAIRU)

Question 72

Suppose that the euro depreciates. Which figure shows the effect on the Phillips curve in Germany?

A)

B)

C)

D)

Question 73

Suppose that the U.S. dollar appreciates. Which figure shows the effect on the Phillips curve in the United States?

A)

B)

C)

D)

Question 74

Suppose that the Indian rupee loses value against the U.S. dollar. Which figure shows the effect on the Phillips curve in India?

A)

B)

C)

D)

Question 75

Canada is the world's largest exporter of sawn wood, which is used as an input in products produced by other countries. Cutbacks at Canadian lumber factories caused a rise in lumber prices. How does this affect the Phillips curve in China?

A)

B)

C)

D)

Question 76

The use of automated harvesting machines greatly increased productivity in farming. How does this affect the Phillips curve for an economy where agriculture is a significant part of GDP?

A)

B)

C)

D)

Question 77

If robots replace workers on the production lines, what do we expect would happen to the Phillips curve?

A)

B)

C)

D)

Question 78

Suppose the Chinese economy is experiencing significant excess demand. Which figure shows the effect on the Phillips curve in China?

A)

B)

C)

D)

Question 79

Suppose the Kenyan markets are experiencing insufficient demand. Which figure shows the effect on the Phillips curve in Kenya?

A)

B)

C)

D)

Question 80

The output gap becomes negative in Bangladesh. Which figure shows the effect on the Phillips curve in Bangladesh?

A)

B)

C)

D)