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

Question 1

For this question,assume that individuals form expectations of inflation according to the following equation πᵉt = θπt₋₁.From 1970 on,the value of θ for this equation

A)increased over time and approached 1.
B)decreased over time and approached zero.
C)remained constant at zero.
D)remained constant at negative one.
E) none of the above

Answer 1

increased over time and approached 1.

Question 2

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

A)Solow and Friedman
B)Samuelson and Solow
C)Friedman and Phillips
D)Friedman and Phelps

Answer 2

Samuelson and Solow

Question 3

The original Phillips curve implied or assumed that

A)the markup over labor costs was zero.
B)the expected rate of inflation would be zero.
C)the actual and expected rates of inflation would always be equal.
D)all of the above
E) none of the above

Answer 3

the expected rate of inflation would be zero.

Question 4

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

A)France
B)United States
C)Canada
D)Germany
E) none of the above

Question 5

For this question,assume that the expected rate of inflation is a function of past year's inflation.Also assume that the unemployment rate has greater than the natural rate of unemployment for a number of years.Given this information,we know that

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

Question 6

Use the following Phillips curve equation to answer this question: πt - πt₋₁ = (m + z)- αut.Which of the following will cause an increase in the natural rate of unemployment?

A)a reduction in m
B)an increase in z
C)an increase in α
D)a reduction in expected inflation
E) none of the above

Question 7

Based on the 'early incarnation' of the Phillips curve,explain what effect an increase in the unemployment rate will have on the inflation rate.

Question 8

Since approximately 1970,the most stable Phillips-type relationship for the United States has been between which of the following?

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

Question 9

In which of the following periods was the relationship between the U.S.unemployment rate and U.S.inflation rate unstable?

A)1901 to 1909
B)1911 to 1919
C)1921 to 1929
D)1931 to 1939
E) none of the above

Question 10

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

A)Solow
B)Samuelson
C)Friedman
D)Phillips

Question 11

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

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

Question 12

For this question,assume that the Phillips curve equation is represented by the following equation: πt - πt₋₁ = (m + z)- αut.A reduction in the unemployment rate will cause

A)a reduction in the markup over labor costs (i.e., a reduction in m).
B)an increase in the markup over labor costs.
C)an increase in the inflation rate over time.
D)a decrease in the inflation rate over time.
E) none of the above

Question 13

For this question,assume that the Phillips curve equation is represented by the following: πt - πt₋₁ = (m + z)- αut.Which of the following will cause a reduction in the natural rate of unemployment?

A)an increase in m
B)an increase in z
C)an increase in α
D)an increase in actual inflation
E) an increase in expected inflation

Question 14

When inflation has been persistent,as was the case in the United States during the 1970s,low unemployment rates will likely be associated with

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

Question 15

For this question,assume that the Phillips curve equation is represented by the following equation: πt - πt₋₁ = (m + z)- αut.Given this information,the natural rate of unemployment will be equal to

A)m + z.
B)(m + z - α).
C)α(m + z).
D)0)
E) none of the above

Question 16

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

Question 17

In which of the following decades did the Phillips curve break down for the U.S.?

A)1940s
B)1950s
C)1960s
D)none of the above

Question 18

In the Phillips curve equation,which of the following will cause an increase in the current inflation rate?

A)an increase in the expected inflation rate
B)a reduction in the unemployment rate
C)an increase in the markup, m
D)all of the above
E) none of the above

Question 19

When inflation has not been very persistent,as was the case in the United States before the mid-1960s,we can expect that

A)the expected price level for a given year will equal the previous year's actual price level.
B)the current inflation rate will not depend heavily on past years' inflation rates.
C)lower unemployment rates will be associated with higher inflation rates.
D)all of the above
E) none of the above

Question 20

For this question,assume that the Phillips curve equation is represented by the following: πt - πt₋₁ = (m + z)- αut.Which of the following will not cause an increase in the natural rate of unemployment?

A)a reduction in m
B)a reduction in z
C)an increase in α
D)an increase in the expected rate of inflation
E) all of the above

Question 21

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)productivity
B)the price of the firm's product
C)the average wage in the country
D)the average wage in the industry
E) none of the above

Question 22

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

A)wage indexation will become less important
B)nominal wages will be set for shorter periods of time
C)the markup over labor costs will decrease
D)all of the above

Question 23

Assume that expected inflation is based on the following: πᵉt = θπt₋₁.If θ = 0,we know that

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

Question 24

Which of the following will tend to occur as a result of a reduction in the proportion of a country's workers who have indexed wages?

A)the unemployment rate will be relatively low.
B)the unemployment rate will be relatively high.
C)the inflation rate will be relatively low.
D)a given change in the unemployment rate will cause a relatively smaller change in the inflation rate.
E) none of the above

Question 25

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

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

Question 26

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

A)increase the markup in the Phillips curve equation
B)increase the sum "m + z" in the Phillips curve equation
C)increase the natural rate of unemployment
D)all of the above
E) none of the above

Question 27

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

Question 28

Suppose the Phillips curve is represented by the following equation: πt - πt₋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 rate of inflation will be constant
C)the rate of inflation will tend to decrease
D)none of the above

Question 29

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

A)attempts to maintain output below the natural level of output.
B)results in deflation.
C)both A and B
D)results in steadily rising inflation.

Question 30

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

A)10%.
B)20%.
C)6)5%.
D)5%.
E) none of the above

Question 31

Which of the following will most likely cause a change in the natural rate of unemployment?

A)changes in monetary policy
B)changes in fiscal policy
C)changes in expected inflation
D)all of the above
E) none of the above

Question 32

Assume that expected inflation is based on the following: πᵉt = θπt₋₁. If θ = 1,we know that

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

Question 33

The evidence for the U.S.suggests that the natural rate of unemployment has

A)increased by more than 5% since the 1960s.
B)increased by 1 to 2% since the 1960s.
C)decreased from 2000-2007, lower than it had been in the 1980s.
D)decreased by more than 5% since the 1960s.
E) fluctuated over time since the 1960s.

Question 34

Which of the following does not represent a "labor market rigidity" to which critics refer when discussing unemployment in Europe?

A)generous unemployment insurance
B)restrictive monetary and fiscal policies
C)a high degree of employment protection
D)relatively high minimum wages
E) none of the above

Question 35

Which of the following is one possible explanation for the change in the natural rate of unemployment in the United States during the 1970s?

A)contractionary fiscal policy
B)an increase in the proportion of labor contracts that were indexed
C)contractionary monetary policy
D)all of the above
E) none of the above

Question 36

Since 1970,the evidence for the U.S.suggests that the average rate of unemployment required to keep inflation constant has been

A)between 1% and 2%.
B)between 2% and 3%.
C)between 3% and 4%.
D)between 9% and 10%.
E) none of the above

Question 37

Suppose policy makers overestimate the natural rate of unemployment.In situations like these,policy makers will likely implement policies that result in

A)less unemployment than necessary.
B)an unemployment rate that is "too low."
C)a lower inflation rate than necessary.
D)a steadily increasing inflation rate.
E) overly expansionary monetary and fiscal policy.

Question 38

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

Question 39

Assume that expected inflation is based on the following: πᵉt = θπt₋₁.An increase in θ will cause

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

Question 40

Which of the following will not cause an increase in the natural rate of unemployment?

A)an increase in m
B)an increase in z
C)an increase in the expected inflation rate
D)a reduction in m
E) none of the above

Question 41

During the Great Depression,the actual unemployment rate in the U.S.________,and the natural rate apparently ________.

A)increased; decreased
B)increased; remain unchanged
C)increased; increased as well
D)decreased; increased
E) decreased; remained unchanged

Question 42

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

Question 43

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

Question 44

What is the difference between deflation and disinflation?

Question 45

Which of the following situations generally exists when deflation occurs?

A)Inflation and unemployment are both increasing.
B)Inflation and unemployment are both decreasing.
C)The price level is decreasing.
D)The rate of inflation is falling from, for example, 10% to 3%.
E) The natural rate of unemployment is zero.

Question 46

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

Question 47

As of 2009,what was the last year that U.S.experienced deflation?

A)1933
B)1955
C)1973
D)1991
E) 2001

Question 48

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

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

Question 49

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 50

Which of the following does not explain the relatively low price inflation compared to the higher wage inflation in the U.S.during the 1990s?

A)the appreciation of the dollar
B)a reduction in benefits paid to workers
C)an increase in the natural rate of unemployment
D)a reduction in the price of oil

Question 51

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

Question 52

In the Phillips curve equation,which of the following will cause a reduction in the current inflation rate?

A)a reduction in the expected inflation rate
B)an increase in the unemployment rate
C)a reduction in the markup, m
D)all of the above
E) none of the above

Question 53

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

Question 54

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 55

Explain the natural unemployment rate and its relationship to inflation rate.

Question 56

Why has the U.S.natural rate of unemployment fallen since the early 1990s?

Question 57

During the 1980s and early 1990s,it was believed that the natural rate of unemployment in the U.S.was equal to

A)4%.
B)4)5%.
C)5%.
D)6)5%.
E) 7%.

Question 58

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

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

Question 59

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

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

Question 60

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

Question 61

How will the crisis affect the natural rate of unemployment?