Transcript Tutorial

Chapter 27
Practice Quiz
Tutorial
The Phillips Curve and
Expectations Theory
©2000 South-Western College Publishing
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1. The Phillips curve depicts the relationship
between the
a. unemployment rate and the change in GDP.
b. inflation rate and the interest rate.
c. level of investment spending and the interest
rate.
d. inflation rate and the unemployment rate.
D. The Phillips curve is a theory
developed by A. W. Phillips in 1958.
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2. A difficulty in using the Phillips curve as a
policy menu is the
a. fact that the natural rate of unemployment
does not exist.
b. fact that the curve would not remain in one
position.
c. difficulty deciding between monetary and
fiscal policies.
d. fact that Democrats choose one point on the
curve and Republicans choose another point.
B. The Phillips curve is a theory based on
the assumption that it is stationary.
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3. Since the 1970’s, the
a. Phillips curve has not been stable.
b. inflation rate and the unemployment rate
have been about equal.
c. Phillips curve has proven to be a reliable
model to guide public policy.
d. relationship between the inflation rate and
the unemployment rate moved in a
counterclockwise direction.
A. During 1960-69, the Phillips
curve appeared stable. Since
the 1970’s, the Phillips curve
has not been stable.
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7%
6%
5%
4%
3%
2%
1%
Inflation Rate
The Phillips Curve U.S., 1960’s
69
68
67
66
65
64 60
63 61
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Unemployment Rate
1 2 3 4 5 6 7
5
Inflation Rate
The Phillips Curve U.S., 1970 - 2003
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
80
79
74
81
75
78
77
82
73
76
90
70
84
71
00 89
01 8872
87 85
83
97 96 94
92
99 98 02 03 86
1
2
3
4 5 6 7 8 9
Unemployment Rate
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4. According to the natural rate hypothesis,
a. the Phillips curve is quite flat, so that a large
reduction in employment can be achieved
without inflation.
b. workers only adapt their wage demands to
inflation after a considerable time lag.
c. the Phillips curve is vertical in the long run
at full employment.
d. workers cannot anticipate the inflationary
effects of expansionary public policies.
C. Natural rate hypothesis argues that the
economy will self-correct to the fullemployment unemployment rate.
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5. Adaptive expectations theory
a. argues that the best indicator of the future is
recent information.
b. underestimates inflation when it is
accelerating.
c. overestimates inflation when it is slowing
down.
d. none of the above.
e. all of the above.
E. According to adaptive expectations theory,
expansionary monetary and fiscal policies
to reduce the unemployment rate are
useless in the long run.
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6. The conclusion of adaptive expectations
theory is that expansionary monetary and
fiscal policies intended to reduce the
unemployment rate are
a. effective in the long-run.
b. effective in the short-run.
c. unnecessary and cause inflation in the
long-run.
d. necessary and reduce inflation in the
long-run.
C. This theory believes, after a short-run
reduction in unemployment, that the economy
self-corrects to the natural rate of
unemployment, but at a higher inflation rate.
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7. Most macroeconomic policy changes, say
the rational expectations theorists, are
a. unpredictable.
b. predictable.
c. slow to take place.
d. irrational.
B. Rational expectations theory argues that
people are intelligent and informed. They
not only consider past changes, but also
use all available information to predict the
future, including future monetary and
fiscal policies.
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8. Rational expectations theorists advise the
federal government to
a. change policy often.
b. pursue stable policies.
c. do the opposite of what the public expects.
d. ignore future economic predictions.
C. Rational expectations argues that
systematic and predictable expansionary
monetary and fiscal policies are not only
useless, but also harmful because the only
result is higher inflation.
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Exhibit 10
15%
12%
Inflation Rate
The Short-run and Long-run Phillips Curves
Long-run
Phillips curve
E1
9%
D
6%
Natural rate
3%
Short-run
Phillips curve
Unemployment Rate
2% 4% 6% 8% 10%
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9. Suppose the government shown in Exhibit 10
uses contractionary monetary policy to
reduce inflation from 9 to 6 percent. If people
have adaptive expectations, then
a. the economy will remain stuck at point E1.
b. the natural rate will permanently increase
to 8 percent.
c. unemployment will rise to 8 percent in the
short run.
d. unemployment will remain at 6 percent as
the inflation rate falls.
C. The unemployment rate will rise to 8% as
people adapt their inflationary expectations
to the current inflation rate. Over time,
however, the economy self-corrects to the
natural unemployment rate.
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10. Suppose the government shown in Exhibit
10 uses contractionary monetary policy to
reduce inflation from 9 to 6 percent. If people
have rational expectations, then
a. the economy will remain stuck at point E1.
b. the natural rate will permanently increase
to 8 percent.
c. unemployment will rise to 8 percent in the
short run.
d. unemployment will remain at 6 percent as
the inflation rate falls.
D. Assuming the impact of government policy is
predictable, people immediately anticipate higher
or lower inflation. Workers quickly change their
nominal wages and businesses change prices. The
price level changes but the unemployment
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remains unchanged at the natural rate.
11. Voluntary wage-price restraints are
known as
a. wage-price controls.
b. price rollbacks.
c. wage-price guidelines.
d. anti-inflation commitments.
C. Wage-price guidelines are voluntary
standards set by government rather than
wage-price controls which are legal
restrictions.
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12. Which of the following government policies is
an incomes policy?
a. A reduction in welfare expenditures.
b. The publication of a list of guidelines
suggesting maximum wage and price
increases.
c. An increase in the money supply.
d. All of the above answers are correct.
B. Income policies include presidential
jawboning, wage-price guidelines, and
wage-price controls.
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END
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