Q: If the inflation rate is defined as the percentage change in the price level, which equation correctly expresses this?

$$\text{Inflation Rate} = \frac{P_t - P_{t-1}}{P_{t-1}} \times 100$$

Question 1

Which of the following best describes the short-run Phillips curve?

Accepted Answer

It shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and expected inflation rate remain constant.

Question 2

According to Okun’s Law, if the unemployment rate is 2 percentage points above the natural unemployment rate, by what percentage is real GDP below potential GDP?

Accepted Answer

$$4\%$$

Question 3

If the expected inflation rate increases from $$3\% to$$ $$7\%$$, what happens to the short-run Phillips curve?

Accepted Answer

It shifts upward.

Question 4

Which of the following statements about the long-run Phillips curve is correct?

Accepted Answer

It is a vertical line at the natural unemployment rate.

Question 5

Suppose the Fed unexpectedly increases the growth rate of money. In the short run, what is the likely effect on unemployment and inflation?

Accepted Answer

Unemployment decreases and inflation increases.

Question 6

If the natural unemployment rate decreases, what happens to both the short-run and long-run Phillips curves?

Accepted Answer

Both curves shift leftward.

Question 7

Which of the following is a direct policy target of the Phillips curve?

Accepted Answer

The inflation rate and the unemployment rate.

Question 8

If the Fed wants to lower the unemployment rate below the natural rate, what is the long-term consequence according to the natural rate hypothesis?

Accepted Answer

Both inflation and unemployment will eventually increase.

Question 9

Which of the following best explains why the short-run Phillips curve is downward sloping?

Accepted Answer

Because a lower unemployment rate is associated with a higher inflation rate when expected inflation and the natural unemployment rate are constant.

Question 10

A credible announced plan to reduce inflation is likely to:

Accepted Answer

Lower the expected inflation rate and shift the short-run Phillips curve downward.

Question 11

Suppose the economy is at full employment with an expected inflation rate of $$3\%. $$The Fed unexpectedly slows inflation to $$1\%. $$What is the likely short-run effect?

Accepted Answer

The unemployment rate rises above the natural unemployment rate.

Question 12

Which of the following is true about the relationship between the aggregate supply curve and the short-run Phillips curve?

Accepted Answer

A movement along the aggregate supply curve is equivalent to a movement along the short-run Phillips curve.

Question 13

If the inflation rate is defined as the percentage change in the price level, which equation correctly expresses this?

Accepted Answer

$$	ext{Inflation Rate} = \frac{P_t - P_{t-1}}{P_{t-1}} 	imes 100$$

Question 14

During the period 2008 to 2014, both the natural unemployment rate and expected inflation rate increased. What happened to the short-run Phillips curve?

Accepted Answer

It shifted upward and rightward, worsening the tradeoff.

Question 15

Which of the following best describes rational expectation?

Accepted Answer

A forecast that results from the use of all relevant data and economic science.

Question 16

If the natural unemployment rate increases, what is the effect on the long-run Phillips curve?

Accepted Answer

It shifts rightward.

Question 17

Suppose the Fed wants to reduce inflation with minimal loss of output. Which policy is most effective?

Accepted Answer

A credible announced inflation reduction.

Question 18

Which of the following is NOT a reason why the Phillips curve is important for policymakers?

Accepted Answer

It predicts the long-run relationship between inflation and unemployment.

Question 19

If real GDP exceeds potential GDP, what happens to the unemployment rate?

Accepted Answer

It falls below the natural unemployment rate.

Question 20

Which of the following events would shift both the short-run and long-run Phillips curves to the left?

Accepted Answer

A decrease in the natural unemployment rate.

The Short-Run Policy Tradeoff: Inflation and Unemployment (Chapter 15 Study Notes)

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