Question

Question) If the natural rate of unemployment falls,
a. both the short-run Phillips curve and the long-run Phillips curve shift.

b. only the short-run Phillips curve shifts.

c. only the long-run Phillips curve shifts.

d. neither the short-run nor the long-run Phillips curves shift.

Question) If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has

a. higher unemployment and lower output.

b. higher unemployment and higher output.

c. lower unemployment and lower output.

d. lower unemployment and higher output.

Answer 1

1) The correct option is: a. both the short-run Phillips curve and the long-run Phillips curve shift.

The inverse relationship between the unemployment rate and inflation when graphically charted is called the Phillips curve. William Phillips pioneered the concept first in his paper "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,' in 1958. This theory is now proven for all major economies of the world.

2) The correct option is: a. higher unemployment and lower output.

In most economic models, the level of output that is produced is proportional to the level of the inputs typically, capital and labor. Thus, one might imagine that increasing unemployment above its natural rate might be associated with output falling below its potential, and vice versa.

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