Chapter 17

Phillips Curve

A curve showing the​ short-run relationship between the unemployment rate and the inflation rate

structural relationship

A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods

As of​ 1993, the Fed sets targets for which of the following in order to achieve price stability and high​ employment? A. Federal funds rate B. M1 definition of the money supply C. M2 definition of the money supply D. Discount rate

A. Federal funds rate

Why do most economists believe that it is important for a​ country's central bank to be independent of the rest of the​ country's central​ government? A. Independent central banks are more effective at fighting inflation. B. Independent central banks are able to help governments finance budget deficits. C. Independent central banks are more able to stabilize financial markets. D. Independent central banks are able to prevent business cycles.

A. Independent central banks are more effective at fighting inflation

Indicate the two main objections to the idea that the​ short-run Phillips curve is vertical. A. Workers and firms might not have rational expectations. B. Any wage rising more quickly than the rate of inflation is actually falling. C. Wages tend to adjust quickly. D. Contracts with workers keep wages sticky.

A. Workers and firms might not have rational expectations and D. Contracts with workers keep wages sticky

Economists who believed that the Phillips curve represented a structural relationshipLOADING... believed that the curve represented A. a permanent​ trade-off between unemployment and inflation. B. a cyclical​ trade-off between unemployment and inflation. C. a temporary​ trade-off between unemployment and inflation. D. no​ trade-off between unemployment and inflation.

A. a permanent trade-off between unemployment and inflation

Economists during the early 1960s thought of the Phillips curve as a​ "policy menu" because they thought that the Phillips curve A. represented a structural relationship in the economy that would not change as a result of policy changes. B. presented policymakers with a reliable menu of combinations of unemployment and inflation. C. represented a relationship that did not depend on consumers and firms and could change over time. D. represented a direct relationship between unemployment and inflation in the short run.

A. represented a structural relationship in the economy that would not change as a result of policy changes

​If, in the long​ run, real GDP returns to its potential​ level, then in the long​ run, A. the Phillips curve is vertical. B. the Phillips curve represents a structural relationship. C. the Phillips curve disappears. D. the Phillips curve is upward sloping.

A. the Phillips curve is vertical

discretion strategy

Allows the Fed to adjust its policies based on changes in the economy

Why​ doesn't the Phillips curve represent a permanent​ trade-off between unemployment and inflation in the long​ run? A. In the long​ run, aggregate supply is upward sloping. B. In the long​ run, aggregate supply is vertical. C. In the long​ run, aggregate demand sets the price level. D. ​"In the long​ run, we're all​ dead."

B. In the long run, aggregate supply is vertical

Slow growth in aggregate demand leads to A. lower unemployment and lower inflation. B. higher unemployment and lower inflation. C. higher unemployment and higher inflation. D. lower unemployment and higher inflation.

B. higher unemployment and lower inflation

When SRAS 1 shifts to SRAS 2​, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)? A. It shifts down such that a given level of unemployment occurs at a lower price level. B. It shifts up such that a given level of unemployment occurs at a higher price level. C. It shifts down such that a given level of unemployment occurs at a higher price level. D. It shifts up such that a given level of unemployment occurs at a lower price level.

B. it shifts up such that a given level of unemployment occurs at a higher price level

Models that use​ factors, such as technology​ shocks, to explain fluctuations in real GDP instead of changes in the money supply are called A. real technology models. B. real business cycle models. C. real monetary models. D. monetary business cycle models.

B. real business cycle models

Suppose that the inflation rate is increasing each year for a number of​ years, then A. workers and firms are better off if they ignore the inflation rate completely since they cannot control it anyway. B. real wages will decline substantially and profits will decline because firms will not be able to keep up with inflation by increasing the prices of their products. C. the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational​ expectations, then they will use all the available information to forecast future inflation. D. the adaptive expectations hypothesis is likely to give more accurate forecasts because if workers or firms have adaptive​ expectations, then they will expect the future inflation to follow the pattern of past inflation rates.

C. the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational expectations, then they will use all the available information to forecast future inflation

If workers and firms have rational​ expectations, they will A. behave as if they expected the actual inflation rate during one year to continue into the next​ year; thus, they forecast future rates of inflation based on past rates of inflation. B. ignore the inflation rate since their real wages never keep up with inflation anyway. C. use all available information when forming their expectations of future​ inflation; thus, the actual inflation rate will be equal to the expected inflation rate. D. depend on rational information about wages and prices and thus often fail to realize that as prices​ rise, inflation will not increase the average wage in the economy.

C. use all available information when forming their expectations of future inflation; thus, the actual inflation rate will be equal to the expected inflation rate

What is the Fed doing to increase the credibility of its​ policies? A. Announcing the federal funds target rate. B. Whenever a change in policy is​ announced, the change actually takes place. C. Conducting more open market purchases of government securities. D. A and B only.

D. A and B only

According to many economists and​ policymakers, what other options does the Fed have to improve its credibility with​ workers, firms, and​ investors? A. Following a discretion strategy. B. Following the Taylor rule. C. Following a rules strategy. D. All of the above.

D. all of the above

The short minus runshort−run Phillips curve​ is: A. positively sloped. B. the same as the​ short-run aggregate supply curve. C. horizontal. D. downward sloping.

D. downward sloping

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The​ curve, shown at the​ right, indicates what type of relationship between the two​ variables? A. No relationship B. Direct relationship C. Positive relationship D. Inverse relationship

D. inverse relationship

In​ 2010, Congress passed the Wall Street Reform and Consumer Protection Act​ (Dodd-Frank Act) which A. required Congress to audit certain Fed activities. B. required full disclosure of loan charges. C. reduced the number of Federal Reserve Banks to ten. D. made it much more difficult for the Fed to use a​ too-big-to-fail policy.

D. made it much more difficult for the Fed to use a too-big-to-fail policy

rational expectations

Expectations formed by using all available information about an economic variable

rules strategy

Following specific and publicly announced guidelines for​ policy, regardless of the state of the economy

Taylor rule

The Fed sets a target federal funds rate following an equation that includes the inflation​ rate, the real equilibrium federal funds​ rate, the​ "inflation gap," and the​ "output gap."

natural rate of unemployment

The unemployment rate that exists when the economy is at potential GDP

The short-run Phillips curve exhibits a ______________, whereas the long-run Phillips curve does not.

a trade-off between inflation and unemployment

when aggregate demand​ increases, unemployment _______ and inflations ________. When aggregate demand​ decreases, unemployment ________ and inflation _______.

falls; rises; increases; falls

If actual inflation is less than expected inflation, the actual real wage is _______ than the expected real wage, and the unemployment rate _______.

greater; rises

If actual inflation is greater than expected inflation, then the actual real wage is ________ than the expected real wage, and the unemployment rate ________.

less; falls

aggregate demand and aggregate supply model explicitly shows changes in the __________ while the Phillips curve explicitly shows the ___________.

level of real GDP; unemployment rate

when inflation is high, unemployment tends to be_______; when inflation is low, unemployment tends to be ________

low; high

while the aggregate demand and aggregate supply model shows the _________the Phillips curve explicitly shows the _________.

price level; inflation rate

nonaccelerating inflation rate of unemployment

the unemployment rate at which the inflation rate has no tendency to increase or decrease.

True/False The inverse relationship between inflation rate and unemployment rate exists in the short​ run, but disappears in the long run

true