Question 1

According to the Keynesian theory, what is the primary reason why an increase in the money supply can increase output in the short run but not in the long run?

Accepted Answer

Because nominal wages are sticky in the short run but flexible in the long run.

Question 2

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

Accepted Answer

It is vertical at the natural rate of unemployment.

Question 3

Suppose the central bank unexpectedly increases the money supply. According to the short-run Phillips curve, what is the likely immediate effect on unemployment and inflation?

Accepted Answer

Unemployment decreases and inflation increases.

Question 4

Which equation represents the relationship between unemployment, actual inflation, and expected inflation as described by Friedman and Phelps?

Accepted Answer

$$Unemployment\ rate = Natural\ rate\ of\ unemployment - \alpha (Actual\ inflation - Expected\ inflation)$$

Question 5

What is the main implication of monetary neutrality in the long run, according to classical theory?

Accepted Answer

Changes in the money supply affect only the price level, not real output.

Question 6

During the 1970s, many advanced economies experienced stagflation. Which event contributed to a shift in the short-run Phillips curve during this period?

Accepted Answer

A supply shock caused by a sharp increase in oil prices.

Question 7

If expected inflation increases, what happens to the short-run Phillips curve?

Accepted Answer

It shifts upward (to the right), leading to higher inflation at every unemployment rate.

Question 8

Which of the following statements is most consistent with the data since the 1970s regarding the Phillips curve?

Accepted Answer

The negative relationship between inflation and unemployment has weakened or disappeared.

Question 9

A central bank wants to reduce inflation in the short run. According to the AD-AS model and the Phillips curve, which policy is most likely to achieve this, and what is a likely side effect?

Accepted Answer

Contractionary monetary policy, which may increase unemployment.

Question 10

Which of the following best explains why the short-run Phillips curve may shift rather than move along the curve?

Accepted Answer

A change in expected inflation or a supply shock.

Question 11

Suppose actual inflation is 5%, expected inflation is 2%, the natural rate of unemployment is 6%, and $$\alpha = 0.5. $$According to the Friedman-Phelps equation, what is the unemployment rate?

Accepted Answer

$$Unemployment\ rate = 6\% - 0.5 	imes (5\% - 2\%) = 4.5\%$$

Question 12

Which of the following is a key difference between the Keynesian and classical views of the effects of monetary policy?

Accepted Answer

Keynesians believe monetary policy affects output in the short run, while classicals believe it only affects prices.

Question 13

If the central bank continuously increases the money supply and people come to expect this, what will happen to unemployment in the long run according to the expectations-augmented Phillips curve?

Accepted Answer

Unemployment will return to the natural rate.

Question 14

Which of the following scenarios would most likely cause stagflation?

Accepted Answer

A negative supply shock, such as a sudden increase in oil prices.

Question 15

Which of the following best describes the concept of 'monetary neutrality'?

Accepted Answer

In the long run, changes in the money supply affect only nominal variables, not real variables.

Question 16

Which of the following would NOT cause a shift in the short-run Phillips curve?

Accepted Answer

A temporary increase in aggregate demand.

Question 17

If the central bank wants to exploit the short-run tradeoff between inflation and unemployment, which policy would it most likely use?

Accepted Answer

Expansionary monetary policy to reduce unemployment at the cost of higher inflation.

Question 18

Which of the following is a plausible explanation for why the short-run Phillips curve appeared to 'flatten' or disappear in the 1970s and 1980s?

Accepted Answer

Rising inflation expectations and supply shocks.

Chapter 17: The Phillips Curve – Money, Inflation, and Unemployment

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