AP Macro Phillips Curve — Questions and Answers

Question 1: The Phillips Curve illustrates the short-run relationship between which two macroeconomic variables?

GDP growth and interest rates
Inflation and unemployment (Correct answer)
Money supply and interest rates
Exports and imports

Correct answer: Inflation and unemployment

The Phillips Curve shows the inverse relationship between the inflation rate and the unemployment rate in the short run.

Question 2: Along the short-run Phillips Curve (SRPC), when unemployment decreases, inflation tends to:

Decrease
Remain constant
Increase (Correct answer)
Turn negative (deflation)

Correct answer: Increase

The SRPC shows an inverse relationship — lower unemployment corresponds to higher inflation as demand for labor drives up wages and prices.

Question 3: What does the Non-Accelerating Inflation Rate of Unemployment (NAIRU) represent on a Phillips Curve diagram?

The inflation rate when unemployment is zero
The unemployment rate consistent with stable inflation (Correct answer)
The maximum possible unemployment rate in an economy
The minimum inflation rate a central bank can achieve

Correct answer: The unemployment rate consistent with stable inflation

NAIRU is the unemployment rate at which inflation neither accelerates nor decelerates, representing the long-run equilibrium unemployment rate.

Question 4: If the economy is operating below the NAIRU, which of the following is most likely to occur over time?

Deflation
Rising unemployment
Accelerating inflation (Correct answer)
Decreasing interest rates

Correct answer: Accelerating inflation

Below the NAIRU, the labor market is overly tight, creating sustained upward wage pressure that causes inflation to accelerate over time.

Question 5: The concept of 'stagflation' in the 1970s challenged the simple Phillips Curve because it demonstrated that:

Unemployment and inflation cannot coexist in any economy
High inflation and high unemployment can occur simultaneously (Correct answer)
The Phillips Curve slope was steeper than economists originally believed
Unemployment always causes deflation in the long run

Correct answer: High inflation and high unemployment can occur simultaneously

Stagflation — simultaneous high inflation and high unemployment — contradicted the original Phillips Curve's inverse relationship between the two variables.

Question 6: Which economists are primarily credited with developing the expectations-augmented Phillips Curve in the late 1960s?

John Maynard Keynes and Paul Samuelson
Milton Friedman and Edmund Phelps (Correct answer)
A.W. Phillips and Robert Solow
Paul Volcker and Alan Greenspan

Correct answer: Milton Friedman and Edmund Phelps

Milton Friedman and Edmund Phelps independently argued that inflation expectations shift the short-run Phillips Curve, making the long-run curve vertical.

Question 7: A.W. Phillips originally developed the Phillips Curve relationship using wage and unemployment data from which country?

United States
Germany
Japan
United Kingdom (Correct answer)

Correct answer: United Kingdom

A.W. Phillips developed the curve in 1958 using nearly 100 years of UK wage inflation and unemployment data.

Question 8: The long-run Phillips Curve (LRPC) is typically depicted as:

A downward-sloping curve similar to the SRPC
An upward-sloping curve
A vertical line at the natural rate of unemployment (Correct answer)
A horizontal line at the target inflation rate

Correct answer: A vertical line at the natural rate of unemployment

The LRPC is vertical at the natural rate of unemployment because in the long run, inflation expectations fully adjust and there is no lasting trade-off between inflation and unemployment.

Question 9: What causes the short-run Phillips Curve to shift to the right (outward)?

A decrease in expected inflation
A positive supply shock such as falling oil prices
An increase in expected inflation or a negative supply shock (Correct answer)
An increase in government spending

Correct answer: An increase in expected inflation or a negative supply shock

Higher inflation expectations or negative supply shocks shift the SRPC rightward, producing higher inflation at every unemployment rate.

Question 10: According to the adaptive expectations hypothesis, workers and firms form inflation expectations based on:

Future economic forecasts published by the Federal Reserve
Past inflation experience (Correct answer)
Current money supply growth rates
Current government budget deficits

Correct answer: Past inflation experience

Adaptive expectations means economic agents expect future inflation to resemble past inflation, gradually updating their expectations as new data arrives.

Question 11: If the central bank unexpectedly expands the money supply, the short-run effect on the Phillips Curve would be:

Movement up and to the left along the SRPC (lower unemployment, higher inflation) (Correct answer)
Movement down and to the right along the SRPC (higher unemployment, lower inflation)
A leftward shift of the SRPC
No movement; only the LRPC is affected

Correct answer: Movement up and to the left along the SRPC (lower unemployment, higher inflation)

Unexpected monetary expansion boosts aggregate demand, reducing unemployment and raising inflation — a movement up and to the left along the existing SRPC.

Question 12: In the long run, if a central bank repeatedly tries to hold unemployment below the natural rate, the result will be:

Permanently lower unemployment and stable inflation
Accelerating inflation with unemployment eventually returning to the natural rate (Correct answer)
Deflation combined with rising unemployment
A permanent leftward shift of the LRPC

Correct answer: Accelerating inflation with unemployment eventually returning to the natural rate

Sustained attempts to push unemployment below the natural rate cause inflation expectations to ratchet upward, shifting the SRPC up repeatedly and resulting in accelerating inflation.

Question 13: A negative supply shock, such as a sudden large increase in oil prices, would most directly cause:

Movement down and to the right along the existing SRPC
A rightward shift of the SRPC (Correct answer)
A leftward shift of the SRPC
Movement up and to the left along the existing SRPC

Correct answer: A rightward shift of the SRPC

A negative supply shock raises production costs, increasing inflation at every unemployment rate and shifting the SRPC to the right — the stagflation scenario.

Question 14: Which policy outcome correctly describes a movement along (rather than a shift of) the short-run Phillips Curve?

Contractionary fiscal policy shifts the SRPC leftward, reducing both inflation and unemployment simultaneously
Expansionary monetary policy shifts the SRPC rightward, creating stagflation
Contractionary monetary policy moves the economy to lower inflation and higher unemployment on the same SRPC (Correct answer)
A major technology boom shifts the SRPC rightward

Correct answer: Contractionary monetary policy moves the economy to lower inflation and higher unemployment on the same SRPC

Contractionary monetary policy reduces aggregate demand, moving the economy along the existing SRPC to a point with lower inflation and higher unemployment.

Question 15: The 'sacrifice ratio' in macroeconomics refers to:

The ratio of spending cuts to tax increases during fiscal austerity
The percentage points of GDP lost per percentage point reduction in inflation (Correct answer)
The trade-off between exports and imports in the current account
The cost of reducing the money supply relative to the rise in interest rates

Correct answer: The percentage points of GDP lost per percentage point reduction in inflation

The sacrifice ratio measures how many percentage points of GDP (or the increase in unemployment) are required to reduce the inflation rate by one percentage point.

Question 16: A central bank with high credibility affects the Phillips Curve primarily by:

Shifting the LRPC to the left, lowering the natural rate
Making the SRPC flatter over time
Lowering inflation expectations, shifting the SRPC leftward (Correct answer)
Steepening the slope of the SRPC

Correct answer: Lowering inflation expectations, shifting the SRPC leftward

A credible central bank can lower inflation expectations directly, shifting the SRPC leftward and making disinflation less costly in terms of higher unemployment.

Question 17: Under rational expectations theory, a fully anticipated and credible contractionary monetary policy would:

Cause a severe recession before inflation eventually falls
Reduce inflation with only a minimal increase in unemployment (Correct answer)
Have no effect on either inflation or unemployment
Lead to deflation combined with rising unemployment simultaneously

Correct answer: Reduce inflation with only a minimal increase in unemployment

Under rational expectations, if agents believe a credible disinflation policy, they immediately lower inflation expectations, allowing inflation to fall without large output losses.

Question 18: The 'flattening' of the Phillips Curve observed in many advanced economies since the 1990s suggests that:

Inflation is now far more sensitive to changes in the unemployment rate
Changes in unemployment now have less impact on inflation than they did previously (Correct answer)
The natural rate of unemployment has risen significantly
Central banks have become less credible in managing inflation

Correct answer: Changes in unemployment now have less impact on inflation than they did previously

A flatter SRPC means large changes in unemployment produce only small changes in inflation, often attributed to better-anchored inflation expectations from credible central banks.

Question 19: Well-anchored inflation expectations affect the short-run Phillips Curve by:

Causing the SRPC to become steeper over time
Shifting the LRPC permanently to the right
Keeping the SRPC relatively stable even during temporary economic shocks (Correct answer)
Eliminating the natural rate of unemployment (NAIRU)

Correct answer: Keeping the SRPC relatively stable even during temporary economic shocks

When inflation expectations are well-anchored, temporary shocks do not shift the SRPC significantly because agents do not revise their long-run inflation expectations.

Question 20: During the Volcker disinflation of the early 1980s, the Federal Reserve's contractionary policy primarily resulted in:

A near-painless reduction in inflation because of rational expectations
Higher inflation accompanied by lower unemployment
A severe recession and sharply higher unemployment before inflation finally fell (Correct answer)
A rightward shift of the long-run Phillips Curve

Correct answer: A severe recession and sharply higher unemployment before inflation finally fell

The Volcker disinflation caused a deep recession in 1981–82 with unemployment exceeding 10%, demonstrating that disinflation involves significant real short-run costs.

Question 21: On an AP Macro exam, if the economy has an inflationary gap, this corresponds to which location on a Phillips Curve diagram?

A point on the LRPC above the intersection with the SRPC
A point on the SRPC to the left of the LRPC, with unemployment below the natural rate and above-target inflation (Correct answer)
A point on the SRPC to the right of the LRPC, with unemployment above the natural rate and below-target inflation
The exact intersection point of the SRPC and the LRPC

Correct answer: A point on the SRPC to the left of the LRPC, with unemployment below the natural rate and above-target inflation

An inflationary gap means actual unemployment is below the natural rate, placing the economy to the left of the LRPC on the SRPC with above-target inflation.

AP Macro Phillips Curve

The Phillips Curve illustrates the short-run relationship between which two macroeconomic variables?

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