AP Macro Phillips Curve 2 — Questions and Answers
Question 1: 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 2: 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 3: 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 4: 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 5: 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 6: 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 7: 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.
AP Macro Phillips Curve 2
The long-run Phillips Curve (LRPC) is typically depicted as: