Q: Which equation best represents the real wage when the nominal wage is $$W$$ and the price level is $$P$$?

$$ \text{Real Wage} = \frac{W}{P} $$

Question 1

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

Accepted Answer

A graph showing the short-run relationship between the unemployment rate and the inflation rate.

Question 2

Suppose the expected inflation rate is 2% and the actual inflation rate turns out to be 5%. According to the Phillips curve framework, what is the likely short-run effect on unemployment?

Accepted Answer

Unemployment will fall below the natural rate.

Question 3

Which equation best represents the real wage when the nominal wage is $$W$$ and the price level is $$P$$?

Accepted Answer

$$ 	ext{Real Wage} = \frac{W}{P} $$

Question 4

Why did Milton Friedman and Edmund Phelps argue that the long-run Phillips curve is vertical?

Accepted Answer

Because in the long run, employment is determined by potential GDP and is independent of the inflation rate.

Question 5

If the Federal Reserve wants to reduce inflation, what is the likely short-run consequence according to the Phillips curve?

Accepted Answer

An increase in unemployment.

Question 6

Which of the following best describes the concept of NAIRU?

Accepted Answer

The unemployment rate at which inflation is stable and does not accelerate or decelerate.

Question 7

Suppose the Federal Reserve announces a contractionary monetary policy, but the public does not believe the Fed will follow through. What is the likely effect on inflation expectations and the Phillips curve?

Accepted Answer

Inflation expectations will remain high, and the short-run Phillips curve will not shift.

Question 8

Which of the following is a key difference between adaptive and rational expectations regarding inflation?

Accepted Answer

Rational expectations use all available information, while adaptive expectations rely mainly on past inflation.

Question 9

A supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift in the short-run aggregate supply curve and an upward shift in the short-run Phillips curve.

Question 10

Which of the following statements about the credibility of the Federal Reserve is most accurate?

Accepted Answer

If the Fed has high credibility, its policy announcements are more likely to influence inflation expectations.

Question 11

If the natural rate of unemployment decreases due to demographic changes, what happens to the long-run Phillips curve?

Accepted Answer

It shifts to the left.

Question 12

Which of the following best describes the 'too-big-to-fail' policy adopted by the Fed during the 2007–2009 financial crisis?

Accepted Answer

Preventing large financial firms from failing to avoid damaging the financial system.

Question 13

Which of the following is a likely consequence of a central bank lacking independence from the government?

Accepted Answer

Higher inflation rates due to political pressure for expansionary policies.

Question 14

Suppose the Bank of Japan controls both short-term and long-term interest rates through yield curve control. What is a potential risk of this policy?

Accepted Answer

It may distort the government bond market by making the central bank the dominant buyer.

Question 15

If the Federal Reserve follows a policy rule such as the Taylor rule, what is the main intended benefit?

Accepted Answer

To provide a predictable and systematic response to economic conditions.

Question 16

During the 1970s, the U.S. experienced both high inflation and high unemployment. What is this phenomenon called?

Accepted Answer

Stagflation

Question 17

Which of the following best explains why the Phillips curve relationship appeared to break down in the 1970s?

Accepted Answer

Supply shocks and changing inflation expectations shifted the short-run Phillips curve.

Question 18

If workers and firms have rational expectations, what is the effect of an anticipated expansionary monetary policy on unemployment in the short run?

Accepted Answer

Unemployment will remain at the natural rate.

Question 19

Which of the following is a real-world example of a supply shock affecting the Phillips curve?

Accepted Answer

The OPEC oil embargo in the 1970s.

Question 20

Suppose the unemployment rate is below the natural rate and inflation is above 4%. According to historical evidence cited by Larry Summers, what is the likely outcome within two years?

Accepted Answer

The economy will enter a recession.

Inflation, Unemployment, and Federal Reserve Policy: The Phillips Curve and Modern Central Banking

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