ophillips Curve Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 ophillips Curve Multiple Choice Identify the choice that best completes the statement or answers the question. 1. If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%: A. disinflation is likely to occur. B. there will be no effect on prices. C. inflation will increase. D. the short-run Phillips curve will shift down. E. deflation is likely to occur. 2. 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 E. equal to; increases 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 optimum level of employment. E. an inverse relationship between unemployment and the real interest rate. Figure 34-1: Expected Inflation and the Short-Run Phillips Curve SRPC 0 is the Phillips curve with an expected inflation rate of 0%; SRPC 2 is the Phillips curve with an expected inflation rate of 2%.

2 4. Use the Expected Inflation and the Short-Run Phillips Curve Figure Suppose that this economy currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation would: A. decrease to 2%. E. increase to 8%. 5. Use the Expected Inflation and the Short-Run Phillips Curve Figure Suppose that this economy currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation would: A. decrease to 2%. E. decrease to -4%. 6. Use the Expected Inflation and the Short-Run Phillips Curve Figure Suppose that this economy currently has an unemployment rate of 6%, inflation of 2%, and has an expectation of 2% future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation would: A. decrease to 2%. E. increase to 6%. 7. Use the Expected Inflation and the Short-Run Phillips Curve Figure Suppose that this economy currently has an unemployment rate of 6%, inflation of 2%, and has an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation would: A. decrease to 0%. E. decrease to -2%. 8. A tradeoff between unemployment and inflation is depicted by: A. a Phillips curve. B. Keynes's law. C. the multiplier. D. a Friedman curve. E. the Okun curve.

3 9. Each point on a Phillips curve is a different combination of: A. price and quantity. B. the inflation rate and the unemployment rate. C. the interest rate and investment. D. saving and disposable income. E. aggregate price level and the unemployment rate. 10. 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. E. the interest rate varies inversely with investment spending. 11. Suppose there is supply shock due to a fall in commodity prices, the short-run Phillips curve will: A. shift down. B. show an upward movement along the same curve. C. not be affected at all. D. shift up. E. show a downward movement along the same curve. 12. Suppose you are told that the short-run Phillips curve has shifted downward. Which of the following must have happened? A. The SRAS curve has shifted to the left. B. The SRAS curve has shifted to the right. C. The AD curve has shifted to the left. D. The AD curve has shifted to the right. E. The LRAS curve has shifted to the right. 13. Suppose you are told that there has been a downward movement along the fixed short-run Phillips curve. Which of the following must have happened? A. The AD curve has shifted to the left. B. The AD curve has shifted to the right. C. The SRAS curve has shifted to the left. D. The SRAS curve has shifted to the right. E. The LRAS curve has shifted to the right.

4 Figure 34-2: Short-Run Phillips Curve 14. Use the Short-Run Phillips Curve Figure SRPC 2 is based on an expected inflation rate of: A. 0%. B. 1%. C. 2%. D. 5%. E. 7%. 15. Use the Short-Run Phillips Curve Figure SRPC 1 is based on an expected inflation rate of: A. 0%. B. 1%. C. 2%. D. 3%. E. 5%. 16. Use the Short-Run Phillips Curve Figure Which of the following could have caused SRPC 1 to shift to SRPC 2? A. The AD curve shifted to the left. B. The SRAS curve shifted to the left. C. The AD curve shifted to the right. D. The central bank decreased interest rates. E. The SRAS curve shifted to the right. 17. Stagflation is a combination of: A. restrictive trade policies and inflation. B. budget deficits and trade deficits. C. unemployment and higher taxes. D. unemployment and inflation. E. unemployment and higher real interest rates.

5 18. The long-run Phillips curve is: A. the same as the short-run Phillips curve. B. negatively sloped, showing an inverse relationship between unemployment and inflation. C. vertical at the non-accelerating-inflation rate of unemployment (NAIRU). D. vertical, but unrelated to the NAIRU. E. positively sloped, showing a direct relationship between unemployment and inflation. 19. Which of the following accurately portrays the shape of the long-run Phillips curve? A. horizontal B. vertical C. upward sloping D. downward sloping E. backward bending 20. Suppose the economy is currently in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be: A. a decrease in the natural rate of unemployment and an increase in inflation. B. a decrease in the natural rate of unemployment and no change in inflation. C. no change in the natural rate of unemployment and an increase in inflation. D. no change in the natural rate of unemployment and no change in inflation. E. no change in the natural rate of unemployment and a decrease in inflation. 21. Deflation: A. hurts borrowers and helps lenders. B. helps borrowers and hurts lenders. C. unlike inflation, affects neither borrowers nor lenders. D. has effects on borrowers and lenders that depend on the amount of the loan. E. hurts both borrowers and lenders.

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