Question 1

The negative relationship between the inflation rate and the unemployment rate is known as the:

Accepted Answer

The negative relationship between the inflation rate and the unemployment rate is captured by the short-run Phillips curve, which shows that when unemployment is low (i.e., the economy is near full employment), inflation tends to be higher, and vice versa. This relationship holds in the short-run, as over the long-run, inflation and unemployment are not directly related. The short-run Phillips curve is a key concept in macroeconomics and helps to explain the trade-off between unemployment and inflation that policy-makers face.

Question 2

An increase in the expected rate of inflation:

Accepted Answer

An increase in the expected rate of inflation shifts the short-run Phillips curve up. This means that at any given level of unemployment, the expected rate of inflation is higher, and as a result, the actual rate of inflation will be higher too. This is because firms will expect higher prices for the goods and services they sell, and therefore will set higher prices, leading to higher inflation. As a result, policymakers face a tradeoff between inflation and unemployment, as increasing aggregate demand to lower unemployment will also lead to higher inflation.

Question 3

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

Accepted Answer

The Phillips curve depicts the inverse relationship between inflation and unemployment. It suggests that when the unemployment is low, the inflation rate will be high and vice versa. The curve was first proposed by economist A.W. Phillips in 1958.

Question 4

If workers expect a lower rate of inflation, the short-run Phillips curve will:

Accepted Answer

The short-run Phillips curve shows the inverse relationship between inflation and unemployment. If workers expect a lower rate of inflation, they will demand lower nominal wage increases, which will lead to lower cost-push inflation. This means that for any given level of unemployment, the expected rate of inflation will be lower, which results in a movement down the Phillips curve (shift down). As a result, the best answer is D (shift down).

Question 5

Use the following to answer questions : Figure: AD-AS Model and the Short-Run Phillips Curve -(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at the figure AD-AS Model and the Short-Run Phillips Curve. If the central bank increases the money supply so that aggregate demand shifts from AD₁ to AD₂, then real GDP will increase by:

Accepted Answer

According to the figure, an increase in aggregate demand from AD₁ to AD₂ leads to an increase in both output and price level. Real GDP increases from Y1 to Y2, which is a 4% increase (i.e., [(Y2-Y1)/Y1] x 100%). Therefore, the correct answer is C.

Question 6

Suppose that the unemployment rate rises as the inflation rate declines. This situation is consistent with a movement along the _____ Phillips curve.

Accepted Answer

The Phillips curve depicts the inverse relationship between unemployment and inflation. When unemployment rises, there is less demand for goods and services, leading to lower prices and inflation. Therefore, a decline in inflation with a rise in unemployment is consistent with a negatively sloped Phillips curve.

Question 7

If the short-run Phillips curve has shifted downward, the _____ curve has shifted to the _____.

Accepted Answer

The short-run Phillips curve shifting downward implies a decrease in inflation for any given level of unemployment, which can result from an increase in short-run aggregate supply (SRAS). This is represented by the SRAS curve shifting to the right, indicating an increase in production at each price level.

Question 8

If there has been an upward movement along the fixed short-run Phillips curve, the _____ curve has shifted to the _____.

Accepted Answer

The answer of If there has been an upward movement...

Question 9

Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _____, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _____.

Accepted Answer

Expectations of a higher inflation rate shift the short-run aggregate supply curve to the left because producers require higher prices to cover expected increases in costs. This shift worsens the trade-off between inflation and unemployment, leading to higher inflation at each level of unemployment, which is represented by an upward shift in the short-run Phillips curve.

Question 10

Use the following to answer questions : Figure: AD-AS Model and the Short-Run Phillips Curve -(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at AD-AS Model and the Short-Run Phillips Curve. If the central bank decreases the money supply so that aggregate demand shifts from AD₂ to AD₁, then the unemployment rate will be:

Accepted Answer

A decrease in the money supply shifts the aggregate demand curve leftward, leading to lower output and higher unemployment. In the context of the Phillips Curve, this corresponds to a movement up along the curve, indicating a higher unemployment rate, which is 6% in this scenario.

Question 11

Use the following to answer questions :
Figure: Expected Inflation and the Short-Run Phillips Curve
SRPCS1U1B10S1U1B0 is the Phillips curve with an expected inflation rate of zero; SRPCS1U1B12S1U1B0 is the Phillips curve with an expected inflation rate of 2%. 
-(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

Accepted Answer

According to the Phillips curve with an expected inflation rate of zero (SRPC₀), a decrease in unemployment from 6% to 4% will increase the expected inflation rate from zero to 2%. However, if the actual inflation rate is equal to the expected inflation rate, then the inflation rate will rise to 2%. Therefore, inflation will rise to 2% (Choice C).

Question 12

Along a Phillips curve:

Accepted Answer

Along a Phillips curve, the inflation rate varies inversely with the unemployment rate. This means that as unemployment decreases, inflation tends to increase, and as unemployment increases, inflation tends to decrease.

Question 13

A Phillips curve implies a negative relationship between:

Accepted Answer

A Phillips curve shows the relationship between inflation and unemployment. It indicates that as unemployment falls, inflation will typically rise, and as unemployment increases, inflation will fall.

Question 14

If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the _____.

Accepted Answer

A shift of the short-run Phillips curve upward indicates that for any given level of unemployment, there is now a higher rate of inflation. This means that the equilibrium level of output must decrease, causing a leftward shift in the SRAS (short-run aggregate supply) curve.

Question 15

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

Accepted Answer

The Phillips curve shows the relationship between inflation and unemployment. Each point on the curve shows a different combination of inflation and unemployment rates. Therefore, option B is the correct answer. Options A, C, and D represent different economic concepts, but they are not directly related to the Phillips curve.

Question 16

Use the following to answer questions :
Figure: Expected Inflation and the Short-Run Phillips Curve
SRPCS1U1B10S1U1B0 is the Phillips curve with an expected inflation rate of zero; SRPCS1U1B12S1U1B0 is the Phillips curve with an expected inflation rate of 2%. 
-(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

Accepted Answer

When the central bank decreases the money supply, aggregate demand shifts left, leading to higher unemployment and lower inflation. With an initial unemployment rate of 6% and no inflation, an increase in unemployment to 8% suggests a movement along the Phillips Curve, resulting in deflation or negative inflation, hence -2%.

Question 17

Use the following to answer questions : Figure: AD-AS Model and the Short-Run Phillips Curve -(Figure: AD-AS Model and the Short-Run Phillips Curve) Look at AD-AS Model and the Short-Run Phillips Curve. If the central bank increases the money supply so that aggregate demand shifts from AD₁ to AD₂, then the inflation rate will be:

Accepted Answer

The answer of Use the following to answer questions :
Figure:...

Question 18

If there has been a downward movement along the fixed short-run Phillips curve, the _____ curve has shifted to the _____.

Accepted Answer

A downward movement along the fixed short-run Phillips curve indicates that inflation has decreased while unemployment has increased, which is consistent with a leftward shift of the Aggregate Demand (AD) curve. This shift suggests a decrease in the overall demand for goods and services in the economy, leading to lower inflation and higher unemployment.

Question 19

The short-run Phillips curve:

Accepted Answer

The short-run Phillips curve shows an inverse relationship between the inflation rate and short-run unemployment rate. It is downward sloping because there is a trade-off between the two variables in the short run. When unemployment is low, inflation tends to be high, and vice versa. However, in the long run, the Phillips curve becomes vertical as there is no trade-off between inflation and unemployment rates.

Question 20

Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will:

Accepted Answer

A fall in commodity prices reduces production costs, leading to an increase in supply. This can lower inflation, causing the short-run Phillips curve to shift down.

Quiz 16: Inflation, Disinflation, and Deflation

The negative relationship between the inflation rate and the unemployment rate is known as the:

An increase in the expected rate of inflation:

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

If workers expect a lower rate of inflation, the short-run Phillips curve will:

Suppose that the unemployment rate rises as the inflation rate declines. This situation is consistent with a movement along the _____ Phillips curve.

If the short-run Phillips curve has shifted downward, the _ curve has shifted to the _.

If there has been an upward movement along the fixed short-run Phillips curve, the _ curve has shifted to the _.

Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _.

Along a Phillips curve:

A Phillips curve implies a negative relationship between:

If the short-run Phillips curve has shifted upward, the _ curve has shifted to the _.

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

If there has been a downward movement along the fixed short-run Phillips curve, the _ curve has shifted to the _.

The short-run Phillips curve:

Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will: