Question 1

Each point on a Phillips curve is a different combination of:
A) price and quantity.
B) inflation and unemployment.
C) the interest rate and investment.
D) saving and disposable income.

Accepted Answer

The Phillips curve shows the relationship between inflation and unemployment, with each point being a different combination of those two variables. Therefore, option B is the correct choice. Option A is not correct because quantity is not a variable in the Phillips curve. Option C is not correct because the interest rate and investment are not directly related to the Phillips curve. Option D is not correct because saving and disposable income are not variables in the Phillips curve.

Question 2

Okun's law suggests that a _____% increase in a positive output gap _____ the unemployment rate by _____%.
A) 1; increases; 0.5
B) 1; decreases; 0.5
C) 0.5; increases; 1
D) 0.5; decreases; 1

Accepted Answer

According to Okun's law, for every 1% increase in a positive output gap, the unemployment rate decreases by 0.5%. Therefore, the correct choice is B, which states that an increase in a positive output gap decreases the unemployment rate by 0.5%. None of the other choices correctly state the relationship between an increase in a positive output gap and the unemployment rate.

Question 3

The short-run Phillips curve shows:
A) a direct relationship between unemployment and inflation.
B) an inverse relationship between unemployment and inflation.
C) consequences of the misperceptions theory.
D) the optimal level of employment.

Accepted Answer

The short-run Phillips curve shows an inverse relationship between unemployment and inflation. This means that when unemployment is low, inflation tends to be high and vice versa.

Question 4

A supply shock:
A) moves our economy along the short-run aggregate supply curve.
B) moves us along the short-run Phillips curve.
C) shifts the short-run Phillips curve.
D) shifts the short-run aggregate supply curve but not the short-run Phillips curve.

Accepted Answer

A supply shock, such as a sudden increase in oil prices, affects production costs and can shift the short-run Phillips curve, which represents the trade-off between inflation and unemployment.

Question 5

Along a Phillips curve:
A) consumption depends on prices.
B) the inflation rate varies inversely with the unemployment rate.
C) the inflation rate varies directly with the unemployment rate.
D) prices and tax rates are directly related.

Accepted Answer

The Phillips curve shows the inverse relationship between inflation and unemployment. As unemployment decreases, the labor market tightens and workers have more bargaining power to demand higher wages, leading to an increase in inflation. Conversely, as unemployment increases, inflation decreases as there is less competition for jobs and workers are willing to accept lower wages. Therefore, choice B is correct.

Question 6

The relationship between the output gap and cyclical unemployment is expressed by:
A) the real business cycle theory.
B) the Taylor rule.
C) the natural rate hypothesis.
D) Okun's law.

Accepted Answer

The relationship between the output gap and cyclical unemployment is expressed by Okun's law, which states that for every 1% increase in the output gap, the unemployment rate will decrease by a certain percentage (usually estimated to be between 0.5% and 1.5%). This inverse relationship between the output gap and cyclical unemployment is a key concept in macroeconomics.

Question 7

The notion that there is a trade-off between inflation and unemployment is expressed as a _____ curve.
A) Phillips
B) Keynes
C) Schumpeter
D) Friedman

Accepted Answer

The Phillips curve shows the inverse relationship between unemployment and inflation. As unemployment decreases, inflation increases and vice versa. This trade-off was first observed by economist A.W. Phillips in the mid-twentieth century, and the relationship has been studied and debated by economists ever since.

Question 8

According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls.
A) below; increases
B) above; decreases
C) below; decreases
D) above; increases

Accepted Answer

The short-run Phillips curve suggests that when actual real GDP is above potential output, the economy is overheating, leading to increased price levels (inflation) and a decrease in unemployment as demand for labor rises.

Question 9

The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____%.
A) 4
B) 5
C) 6.5
D) 9

Accepted Answer

Okun's law states that for every 1% increase in the output gap (the difference between actual and potential output), there will be a 0.5% decrease in the unemployment rate. Since the output gap is currently at -5% (100% - 95%), the predicted increase in the unemployment rate would be 2.5%. Adding this to the natural rate of unemployment (4%) gives us a predicted unemployment rate of 6.5%. Therefore, the correct answer is choice C.

Question 10

According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 4%, and the expected rate of inflation is 5%, then the unemployment rate is _____%.
A) 3.5
B) 3
C) 2.5
D) 1.5

Accepted Answer

Okun's law suggests that for every 1% increase in the output gap, the unemployment rate decreases by about 0.5%. With a 3% output gap, the unemployment rate would decrease by 1.5% from the natural rate of 4%, resulting in an unemployment rate of 2.5%.

Question 11

Okun's law is less than a 1:1 ratio because some:
A) employers quickly lay off workers.
B) employers change the working hours of current employees as demand changes.
C) employees act to job share.
D) workers are not counted as unemployed when they are actively seeking work.

Accepted Answer

Okun's law states that for every 1% increase in GDP, the unemployment rate will decrease by less than 1%. This is because employers have other options, such as changing the working hours of current employees or hiring part-time workers, before resorting to layoffs. Option B correctly identifies one of these alternative options, showing that employers do not always reduce their workforce in response to changes in demand.

Question 12

Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?
A) a reduction in the number of discouraged workers
B) an increase in the number of discouraged workers
C) an increase in the level of employment
D) a decrease in the level of employment

Accepted Answer

An increase in the number of discouraged workers can lead to a fall in the unemployment rate during economic contraction because discouraged workers are not counted as part of the labor force. If more people stop looking for work due to discouragement, the labor force shrinks, and the unemployment rate can decrease even if the economy is not adding jobs.

Question 13

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in:
A) the interest rate.
B) output.
C) wages only.
D) the aggregate price level.

Accepted Answer

The short-run Phillips curve represents the trade-off between inflation and unemployment, and therefore the rate of change in the aggregate price level is the variable that is plotted on the vertical axis. The slope of the Phillips curve shows the responsiveness of inflation to changes in unemployment, and is influenced by factors such as inflation expectations, supply shocks, and wage bargaining power. The interest rate, output, and wages may all be affected by shifts in the Phillips curve, but they are not the primary variables that are represented by it.

Question 14

In 1958, _____ came up with a theory regarding the trade-off between unemployment and inflation.
A) A. W. H. Phillips
B) John Maynard Keynes
C) Joseph Schumpeter
D) Milton Friedman

Accepted Answer

The theory is known as the Phillips Curve and was developed by economist A.W.H. Phillips in 1958. Choice B (John Maynard Keynes) is known for his work on macroeconomic theory and policy, but did not develop the Phillips Curve theory. Choice C (Joseph Schumpeter) is known for his work on entrepreneurship and economic growth, but did not develop the Phillips Curve theory. Choice D (Milton Friedman) is known for his work on monetarism and the role of the money supply in the economy, but did not develop the Phillips Curve theory.

Question 15

The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as _____ law.
A) Okun's
B) Phillips's
C) Greenspan's
D) Keynes's

Accepted Answer

Okun's law states that for every 1% increase in the output gap, there is a 0.5% decrease in the unemployment rate. This relationship has been observed in many economies over time, although the exact relationship may vary. It is named after economist Arthur Okun. Phillips's law is another concept in economics that relates inflation and unemployment, while Greenspan and Keynes are famous economists who made contributions in other areas of economics.

Question 16

According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a _____ in real GDP.
A) 3% increase
B) 2% increase
C) 1% increase
D) 3% decrease

Accepted Answer

The answer of According to recent estimates of Okun's law,...

Question 17

A Phillips curve implies a negative relationship between:
A) consumption and saving.
B) inflation and prices.
C) inflation and unemployment.
D) consumption and inflation.

Accepted Answer

The Phillips curve shows a negative relationship between inflation and unemployment, suggesting that when unemployment is low, inflation tends to be high and vice versa. The other options presented in the question are not directly related to the Phillips curve.

Question 18

_____ depicts a trade-off between unemployment and inflation.
A) The Phillips curve
B) Keynes's law
C) The multiplier
D) The Friedman curve

Accepted Answer

The Phillips curve depicts a trade-off between unemployment and inflation. As unemployment decreases, inflation tends to increase and vice versa, illustrating the inverse relationship between the two variables.

Question 19

A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease

Accepted Answer

When there is a supply shock due to an increase in gasoline prices, firms face higher production costs as transportation costs increase. As a result, firms decrease their level of output, which leads to a decrease in aggregate supply (AS). This shift in AS results in an increase in equilibrium price levels and a decrease in equilibrium output levels. Therefore, there is a decrease in output and an increase in prices, which is consistent with option B.

Question 20

If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:
A) disinflation is likely.
B) it will not affect prices.
C) inflation will increase.
D) the short-run Phillips curve will shift down.

Accepted Answer

When the actual unemployment rate is below the natural rate, it indicates an economy operating above its potential, leading to increased demand for goods and services, which can cause inflation to increase.

Quiz 16: Inflation, Disinflation, and Deflation

Each point on a Phillips curve is a different combination of:

Okun's law suggests that a ___% increase in a positive output gap _ the unemployment rate by ___%.

The short-run Phillips curve shows:

A supply shock:

Along a Phillips curve:

The relationship between the output gap and cyclical unemployment is expressed by:

The notion that there is a trade-off between inflation and unemployment is expressed as a _____ curve.

According to the short-run Phillips curve, when actual real GDP is _ potential output, the price level _ and the unemployment rate falls.

The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____%.

According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 4%, and the expected rate of inflation is 5%, then the unemployment rate is _____%.

Okun's law is less than a 1:1 ratio because some:

Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in:

In 1958, _____ came up with a theory regarding the trade-off between unemployment and inflation.

The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as _____ law.

According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a _____ in real GDP.

A Phillips curve implies a negative relationship between:

_____ depicts a trade-off between unemployment and inflation.

A supply shock caused by an increase in the price of gasoline causes a(n) _ in output and a(n) _ in prices.

If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%: