Question 1

Historical data for the United States has shown a 5% rise in the output gap to correspond to about _____ increase in unexpected inflation.

Accepted Answer

Historical data for the United States has shown a 5% rise in the output gap to correspond to about a 1% increase in unexpected inflation.

Question 2

Using the Phillips curve to forecast future inflation involves which two steps?

Accepted Answer

The Phillips curve relates inflation to the unemployment rate. To forecast future inflation using the Phillips curve, the first step is to assess inflation expectations. This allows for the calculation of unexpected inflation based on the difference between actual inflation and expected inflation. Without considering inflation expectations, the Phillips curve would not be an effective tool for forecasting inflation.

Question 3

High unemployment occurs when:

Accepted Answer

High unemployment occurs when there is insufficient demand for labor, meaning that employers do not have enough work to justify hiring additional workers. This can be due to a variety of factors, including a slowdown in the economy or a decrease in consumer spending. Inflation and the output gap are not direct causes of high unemployment.

Question 4

High unemployment occurs when:

Accepted Answer

High unemployment occurs when the output gap is negative, which means that actual output is lower than potential output. This indicates that there is a decrease in demand for goods and services, leading to businesses cutting back on production and hiring. This results in a higher unemployment rate as more people become unemployed due to job losses or difficulty finding new jobs. Excess demand (choice A) typically leads to inflation, not high unemployment. Inflation rising above inflation expectations (choice B) can lead to a decrease in unemployment if it leads to a higher demand for goods and services, but it is not directly related to high unemployment. The output gap being equal to zero (choice D) indicates that actual output is equal to potential output, which is considered full employment, not high unemployment.

Question 5

Unemployment will rise when:

Accepted Answer

When inflation falls below inflation expectations, firms anticipate lower prices for their products in the future and may reduce production, leading to layoffs and higher unemployment.

Question 6

Which of these choices is correct? Holding all else equal, assuming no supply-side shock, the:

Accepted Answer

According to the Phillips Curve, there exists an inverse relationship between the unemployment rate and inflation. Therefore, as the unemployment rate decreases (holding all else constant), there is upward pressure on wages that ultimately leads to higher prices and unexpected inflation.

Question 7

Which of the graphs shows the correct shape of the labor market Phillips curve?

Accepted Answer

The answer of Which of the graphs shows the correct...

Question 8

When unexpected inflation is zero, the corresponding unemployment rate is the _____ unemployment rate.

Accepted Answer

The equilibrium unemployment rate is the level of unemployment at which the labor market is in balance, with supply and demand for labor being equal. This implies that there is no upward or downward pressure on wages, and hence, no unexpected inflation. Therefore, when unexpected inflation is zero, the corresponding unemployment rate is the equilibrium unemployment rate.

Question 9

When unexpected inflation is zero, the corresponding unemployment rate is the:

Accepted Answer

The non-accelerating inflation rate of unemployment (NAIRU) refers to the level of unemployment when inflation is stable, not accelerating or decelerating, which aligns with the scenario of unexpected inflation being zero.

Question 10

When unexpected inflation is zero, the corresponding unemployment rate is not zero because:

Accepted Answer

Structural and frictional unemployment are not influenced by changes in inflation, as they are caused by factors such as changes in technology or shifts in the labor market. Therefore, even if inflation is unexpected and low, there will still be some level of unemployment due to these factors.

Question 11

When the economy is at potential GDP, the unexpected inflation rate is _____, and the unemployment rate is equal to _____.

Accepted Answer

When the economy is at potential GDP, there is no output gap, meaning there is no excess demand or supply in the economy. Therefore, there is no pressure on prices to increase, hence there is no unexpected inflation. The unemployment rate at potential GDP is the natural rate of unemployment, which is the rate of unemployment that exists when the economy is at full employment and there is no cyclical unemployment.

Question 12

Suppose that the euro depreciates. Which figure shows the effect on the Phillips curve in Germany?

Accepted Answer

A depreciation of the euro will lead to an increase in import prices and an increase in inflation in Germany. This means that the Phillips curve will shift upwards, as shown in figure B, where the original Phillips curve (PC1) shifts to the right to PC2. The other figures either do not show any shift in the Phillips curve or show a shift in the opposite direction.

Question 13

Suppose that the U.S. dollar appreciates. Which figure shows the effect on the Phillips curve in the United States?

Accepted Answer

The answer of Suppose that the U.S. dollar appreciates. Which...

Question 14

Suppose that the Indian rupee loses value against the U.S. dollar. Which figure shows the effect on the Phillips curve in India?

Accepted Answer

When the rupee loses value against the dollar, the cost of imports will increase, leading to an increase in the general price level. This is represented by a shift of the Phillips curve to the right, as shown in option B.

Question 15

Canada is the world's largest exporter of sawn wood, which is used as an input in products produced by other countries. Cutbacks at Canadian lumber factories caused a rise in lumber prices. How does this affect the Phillips curve in China?

Accepted Answer

The rise in lumber prices due to cutbacks at Canadian lumber factories would likely lead to an increase in the cost of inputs for Chinese producers who use sawn wood in their production process. This increase in input costs would cause a decrease in aggregate supply, shifting the Phillips curve to the left (Option B). As a result, the economy would experience both higher prices and higher unemployment in the short run, which is known as stagflation.

Question 16

The use of automated harvesting machines greatly increased productivity in farming. How does this affect the Phillips curve for an economy where agriculture is a significant part of GDP?

Accepted Answer

The answer of The use of automated harvesting machines greatly...

Question 17

If robots replace workers on the production lines, what do we expect would happen to the Phillips curve?

Accepted Answer

The answer of If robots replace workers on the production...

Question 18

Suppose the Chinese economy is experiencing significant excess demand. Which figure shows the effect on the Phillips curve in China?

Accepted Answer

The answer of Suppose the Chinese economy is experiencing significant...

Question 19

Suppose the Kenyan markets are experiencing insufficient demand. Which figure shows the effect on the Phillips curve in Kenya?

Accepted Answer

The answer of Suppose the Kenyan markets are experiencing insufficient...

Question 20

The output gap becomes negative in Bangladesh. Which figure shows the effect on the Phillips curve in Bangladesh?

Accepted Answer

The answer of The output gap becomes negative in Bangladesh....

Quiz 31: Phillips Curve

Historical data for the United States has shown a 5% rise in the output gap to correspond to about _____ increase in unexpected inflation.

Using the Phillips curve to forecast future inflation involves which two steps?

High unemployment occurs when:

High unemployment occurs when:

Unemployment will rise when:

Which of these choices is correct? Holding all else equal, assuming no supply-side shock, the:

Which of the graphs shows the correct shape of the labor market Phillips curve?

When unexpected inflation is zero, the corresponding unemployment rate is the _____ unemployment rate.

When unexpected inflation is zero, the corresponding unemployment rate is the:

When unexpected inflation is zero, the corresponding unemployment rate is not zero because:

When the economy is at potential GDP, the unexpected inflation rate is _, and the unemployment rate is equal to _.

Suppose that the euro depreciates. Which figure shows the effect on the Phillips curve in Germany?

Suppose that the U.S. dollar appreciates. Which figure shows the effect on the Phillips curve in the United States?

Suppose that the Indian rupee loses value against the U.S. dollar. Which figure shows the effect on the Phillips curve in India?

Canada is the world's largest exporter of sawn wood, which is used as an input in products produced by other countries. Cutbacks at Canadian lumber factories caused a rise in lumber prices. How does this affect the Phillips curve in China?

The use of automated harvesting machines greatly increased productivity in farming. How does this affect the Phillips curve for an economy where agriculture is a significant part of GDP?

If robots replace workers on the production lines, what do we expect would happen to the Phillips curve?

Suppose the Chinese economy is experiencing significant excess demand. Which figure shows the effect on the Phillips curve in China?

Suppose the Kenyan markets are experiencing insufficient demand. Which figure shows the effect on the Phillips curve in Kenya?

The output gap becomes negative in Bangladesh. Which figure shows the effect on the Phillips curve in Bangladesh?