Economics 102: Macroeconomics Ch 9. Inflation and Unemployment

The Phillips Curve

• the relationship between inflation and unemployment

• the inverse relationship between the rate of inflation and the unemployment rate

• illustrates that when inflation is low, unemployment is high, and vice versa

• illustrates the relationship between the rate of inflation and the unemployment rate

When aggregate demand increases, unemployment tends to decrease, and inflation tends to increase. How can this be illustrated?

1. As movement along the Phillips Curve

2. As an increase in demand and a decrease in quantity

3. As shifting of the Phillips Curve

4. As shifting of the production possibilities curve

5. As movement along the production possibilities curve

As movement along the Phillips Curve

During the 1960's, what was the relationship between inflation and employment?

1. The positive relationship between inflation and unemployment held true.

2. The relationship between inflation and unemployment was the same as the 1970's.

3. The inverse relationship between inflation and unemployment held true.

4. The inverse relationship between inflation and unemployment did not hold true.

5. Inflation and unemployment were independent.

The inverse relationship between inflation and unemployment held true.

What relationship does the Phillips Curve illustrate?

1. When unemployment is high, inflation is high.

2. When inflation is low, unemployment is low.

3. When inflation is low, the real interest rate is high.

4. When inflation is low, unemployment is high.

5. When unemployment is low, nominal GDP is negative.

When inflation is low, unemployment is high.

In the short run, there tends to be a tradeoff between _____ and _____.

1. inflation and unemployment

2. small businesses and large corporations

3. demand and economic output

4. supply and demand

5. unemployment benefits and the Federal Reserve

inflation and unemployment

What does the Phillips Curve describe?

1. The inverse relationship between the GDP and inflation

2. The relationship between unemployment and GDP

3. The inverse relationship between inflation and unemployment in the economy

4. The inverse relationship between inflation and investment

5. The relationship between the real interest rate and the money supply

The inverse relationship between inflation and unemployment in the economy

What will an increase in aggregate supply do economically?

1. It will cause the long-run Phillips curve to be horizontal.

2. It will lead to a shift in the short-run Phillips curve.

3. It will cause the economy to produce less at all unemployment rates.

4. It will result in a movement along the short-run Phillips curve.

It will lead to a shift in the short-run Phillips curve.

Which of the following would NOT lead to a shift of the short-run Phillips curve?

1. A decrease in aggregate demand.

2. A favorable supply shock.

3. An increase in the minimum wage.

4. An increase in expected inflation.

A decrease in aggregate demand.

Increases in aggregate supply that cause a leftward shift in the Phillips Curve will lead to which of the following?

1. Lower prices and higher unemployment.

2. Lower prices and unemployment.

3. Higher prices and unemployment.

4. Higher prices and lower unemployment.

Lower prices and unemployment.

What is the result of a negative supply shock?

1. It will shift the Phillips curve to the left.

2. It will shift aggregate demand to the left.

3. It will shift the Phillips curve to the right.

4. It will shift the Phillips curve to the left in the short run and to the right in the long run.

It will shift the Phillips curve to the right.

When technology improves across the economy, how and why will the short-run Phillips Curve move?

1. It will shift to the left because there would be more inflation and more unemployment.

2. It will shift to the right because there would be more inflation and more unemployment.

3. It will shift to the left because there would be less inflation and less unemployment.

4. It will shift to the right because there would be less inflation and less unemployment.

It will shift to the left because there would be less inflation and less unemployment.

When economists look at economic output, in the short run, there tends to be _____.

1. more inflation but lower prices

2. a tradeoff between inflation and unemployment

3. a tradeoff between prices and inflation

4. no change in economic growth

a tradeoff between inflation and unemployment

The Phillips curve refers to the relationship between _____ and _____ in the short run.

1. recession; employment

2. inflation; employment

3. inflation; unemployment

4. recession; unemployment

inflation; unemployment

Which of the following scenarios would lead to movement up the Phillips curve?

1. Unemployment rising

2. Aggregate supply remaining the same

3. Inflation remaining constant

4. A rise in aggregate demand

A rise in aggregate demand

In the short run, when the economy is expanding, unemployment tends to be _____ while prices tend to be _____.

1. higher; higher

2. lower; lower

3. lower; higher

4. higher; lower

lower; higher

Economists notice that aggregate demand has been rising in the past few months. How does this impact unemployment?

1. Unemployment will be higher than its natural state.

2. Unemployment will remain roughly the same.

3. A change in aggregate demand is not enough information to infer changes in unemployment.

4. Unemployment will be lower than its natural state.

Unemployment will be lower than its natural state.

The Natural Rate Unemployment

the rate of unemployment at which inflation does not increase or decrease

What happens when unemployment falls below the natural rate?

1. Surpluses tend to develop in the labor market, driving up wages.

2. Shortages tend to develop in the labor market, driving down wages.

3. Surpluses tend to develop in the labor market, driving down wages.

4. Shortages tend to develop in the labor market, driving up wages.

Shortages tend to develop in the labor market, driving up wages.

What does the long-run Phillips curve represent?

1. The long-run relationship between aggregate demand and tax rates.

2. The long-run relationship between the price level and unemployment.

3. The short-run relationship between the price level and unemployment.

4. The long-run relationship between inflation and interest rates.

The long-run relationship between the price level and unemployment.

Which of the following statements is true regarding the long-run Phillips curve?

1. It is horizontal when the labor market is in equilibrium.

2. It is downward-sloping.

3. It is vertical at the natural rate of unemployment.

4. It is horizontal at the natural rate of unemployment.

It is vertical at the natural rate of unemployment.

What is the biggest difference between the short-run and long-run Phillips curve?

1. The short-run Phillips curve is horizontal and the long-run Phillips curve is downward-sloping.

2. The short-run Phillips curve is vertical and the long-run Phillips curve is horizontal.

3. The short-run Phillips curve is downward-sloping and the long-run Phillips curve is vertical.

4. The short-run Phillips curve is U-shaped and the long-run Phillips curve is horizontal.

The short-run Phillips curve is downward-sloping and the long-run Phillips curve is vertical.

During the 1970s, why did the Phillips curve not hold true?

1. It failed to account for changes in inflation expectations.

2. Unemployment was always low.

3. It did not account for taxes.

4. It was replaced by the Keynesian model.

It failed to account for changes in inflation expectations.

inflation

the rate at which the general level of prices for goods and services are increasing over a period of time

unemployment rate

what percentage of people in the labor force is not currently working

inflation-unemployment cycle

the relationship between unemployment and inflation is not static, it cycles through different phases

Phillips Curve

• demonstrates that there is an inverse (i.e., negative) relationship between unemployment and inflation

• in the short-term, as the rate of unemployment goes down, the rate of inflation will go up

stagflation

a nasty economic situation where the rates of unemployment and inflation are high and economic growth is anemic

In the inflation-unemployment cycle, the _____ phase generally transitions into the recovery phase.

1. unemployment

2. stagflation

3. Phillips curve

4. inflation

stagflation

In the past month, unemployment rose. Based on the Phillips Curve, how will this affect inflation? Why?

1. Inflation should be unaffected because there is no relationship between unemployment and inflation.

2. Inflation should rise because there is a positive relationship between unemployment and inflation.

3. It's impossible to say because the Phillips curve is not a predictive mechanism.

4. Inflation should fall because there is a negative relationship between unemployment and inflation.

Inflation should fall because there is a negative relationship between unemployment and inflation.

When did stagflation prompt economists to reconsider the relationship between inflation and unemployment?

1. 1920s

2. 1990s

3. 1970s

4. 1930s

1970s

Which of the following is NOT a characteristic of stagflation?

1. Low rate of growth

2. High inflation

3. Low rate of unemployment

4. High rate of unemployment

Low rate of unemployment

The _____ phase of the inflation-unemployment cycle is characterized by a decrease in inflation and unemployment.

1. stagflation

2. recovery

3. Phillips curve

4. initial

recovery