The Phillips Curve depicts the relationship between: a) Unemployment and inflation b) GDP and inflation c) Interest rates and inflation d) Savings and investment
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- An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. 1. What is the natural rate of unemployment for this economy? 2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. 3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.If inflationary expectations increase, the Phillips curve will A) become upward sloping B) shift to the right C) become vertical D) shift to the leftIf inflationary expectations increase, the Phillips curve will A) become flat B) become vertical C) shift to the left D) shift to the right
- Which of the following is true about the Phillips curve? The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This means that the theoretical Phillips curve does not represent the world well. For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject to supply shocks. The empirical Phillips curve implies that a government must choose between either low unemployment and high inflation or high unemployment and low inflation. When inflation expectations adjust, the negative empirical correlation between inflation and unemployment might disappear.Derive the original Phillips curve and answer the following questions:a) What effect does an increase in the expected price level have on the price level?b) What effect does an increase in the unemployment rate have on the price level?c) What effect does a decrease in business competition have on inflation?d) What is the effect of liberalizing foreign trade?e) What effect does the formation of trade unions have?If the Phillips curve in an economy is given by π = π-1-0.5(u-0.02), then it takes 6 percentage points of cyclical unemployment to reduce inflation by 3 percentage points requires 3 percentage points of cyclical unemployment to reduce the rate of inflation by 6 percentage points the natural rate of unemployment is 3% the natural rate of unemployment is 5% the natural rate of unemployment is 6%
- Which of the following about the Phillips curve is not correct? A) It shows the relation between GDP growth and unemployment. B) It has been redefined as a relation between the change in the rate of inflation and the unemployment rate. C) It was first explored by A. W. Phillips. D) The curve is downward sloping.Consider the original presentation of the Phillips Curve, with inflation on the vertical axis and unemployment on the horizontal axis. Which of the following could NOT shift this Phillips Curve upward? an increase in the price of inputs used in production expected higher prices in the future/higher inflation an increase in the average wages of workers an improvement in production technologyWhich of the following is true about the Phillips curve? Group of answer choices The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This means that the theoretical Phillips curve does not represent the world well. For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject to supply shocks. The empirical Phillips curve implies that a government must choose between either low unemployment and high inflation or high unemployment and low inflation. When inflation expectations adjust, the negative empirical correlation between inflation and unemployment might disappear.
- If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy: A) is producing at its potential GDP. B) is producing at a point where output is more than potential GDP. C) is producing at its equilibrium point. D) is producing at a point where output is less than potential GDP.Which of the following would shift the long-run Phillips curve to the left? a) A change in the expected rate of inflation. b) A natural disaster which temporarily disrupts production. c) Improved technology which increases labour demand. d) A rise in the price of imported inputs.The Phillips curve started as an observed _____ correlation between the inflation rate and the _____. a) positive;unemployment rate b)negative;unemployment rate c)negative;nominal interest rate d)positive;nominal interest rate
