Question

There are two possible outcomes about the economy next year. We will have outcome A if there is a small increase in AD. We will have outcome B if there is a large increase in AD. Comparing the two outcomes, inflation in outcome A is ________ than that in outcome B; unemployment in outcome A is ________ than that in outcome B.

higher; lower

higher; higher

lower; higher

lower; lower

Which of the following statements is incorrect?

The LRPC shifts when there is a change in inflation expectations.

The LRPC shifts when there is a change in structural unemployment.

The SRPC does not shift in the short run.

The SRPC shifts during a stagflation.

In the short run, according to the Phillips curve, there is ________ relationship between inflation and unemployment.

a positive

an uncertain

a negative

no

The long run Phillips curve ________.

		is a vertical line.
		shows no relationship between inflation and unemployment.
		suggests that unemployment will always be at its natural level.
		All of the above are correct.

Answer 1

(Question 1) Option (3)

When AD increases by small amount, price level and output increases less, so inflation is lower and unemployment is higher compared to the case of a larger increase in AD where price level and output incraeses by higher amount.

(Question 2) Option (3)

Short run Phillips curve shifts in short run.

(Question 3) Option (3)

In short run, there is an inverse (negative) relationship between inflation and unemployment, leading to a trade-off.

(Question 4) Option (4)

Long run Phillips curve shows no trade-off between unemployment and inflation rate, so it is vertical, reflecting the natural rate of unemployment.