Phillips Curve: Theory, History, Policy

1) Neutrality of Money suggests that

  1. If the Fed expands the money supply and increases inflation, unemployment decreases
  2. If the Fed expands the money supply and increases inflation, unemployment increases
  3. If the Fed expands the money supply and increases inflation unexpectedly, unemployment decreases
  4. If the Fed expands the money supply and increases inflation unexpectedly, unemployment increases
  5. The Fed expanding the money supply would have no impact on unemployment

2) Keynesian theory as developed in the 1930’s suggested that

  1. If the Fed expands the money supply and increases inflation, unemployment decreases
  2. If the Fed expands the money supply and increases inflation, unemployment increases
  3. If the Fed expands the money supply and increases inflation unexpectedly, unemployment decreases
  4. If the Fed expands the money supply and increases inflation unexpectedly, unemployment increases
  5. The Fed expanding the money supply would have no impact on unemployment

3) When activist polices were implemented in the 1960’s, the economy experienced

  1. Rising inflation and falling unemployment
  2. Stagflation
  3. Monetary neutrality
  4. Several recessions with severe deflation
  5. Vertical Phillips Curve

4) The evidence of the 1950’s and the results of policy changes in the 1960’s

  1. Suggested there’s a trade-off between inflation and unemployment
  2. Convinced economists that Keynesian theory was correct
  3. Created the possibility that the economy would never suffer a recession again
  4. Demonstrated the usefulness of an activist policy
  5. All of the above

5) Stagflation of the 1970’s is important to Macroeconomics because

  1. It called for an increase in the use of governmental fiscal policy
  2. Called into question whether Keynesian theory and policy was correct
  3. Proved that money was neutral
  4. Disproved the misperception theory
  5. Showed that people’s expectations are not important.

6) The multiple Phillips Curve model, which allows the Phillips Curve to shift as people’s expectations change, is an implication or result of

  1. Money neutrality
  2. Original Keynesian theory
  3. Misperception theory
  4. Laissez Faire policy
  5. All of the above

7) The multiple Phillips Curve model suggests

  1. If the Fed expands the money supply and increases inflation, unemployment decreases
  2. If the Fed expands the money supply and increases inflation, unemployment increases
  3. If the Fed expands the money supply and increases inflation unexpectedly, unemployment decreases
  4. If the Fed expands the money supply and increases inflation unexpectedly, unemployment increases
  5. The Fed expanding the money supply would have no impact on unemployment

8) The multiple Phillips Curve model suggests

  1. There is a consistent, dependable trade-off between inflation and unemployment
  2. If the money supply expands, inflation will increase and the economy will experience stagflation
  3. Money is neutral
  4. The result of a change in monetary policy will depend upon what people expected would happen
  5. Surprises raise unemployment and inflation

9) The Fed loosens the money supply, the theory of Money Neutrality suggests

  1. Inflation will increase, and unemployment will decrease
  2. Inflation will increase, and unemployment will increase
  3. Inflation will increase, and unemployment will stay the same
  4. Inflation will increase, and unemployment might go up, might go down, or might stay the same
  5. Inflation will stay the same, but unemployment will go down.

10) The Fed loosens the money supply, the original Keynesian theory suggests

  1. Inflation will increase, and unemployment will decrease
  2. Inflation will increase, and unemployment will increase
  3. Inflation will increase, and unemployment will stay the same
  4. Inflation will increase, and unemployment might go up, might go down, or might stay the same
  5. Inflation will stay the same, but unemployment will go down.

11) The Fed loosens the money supply, the multiple Phillips Curve theory suggests

  1. Inflation will increase, and unemployment will decrease
  2. Inflation will increase, and unemployment will increase
  3. Inflation will increase, and unemployment will stay the same
  4. Inflation will increase, and unemployment might go up, might go down, or might stay the same
  5. Inflation will stay the same, but unemployment will go down.

12) The lower inflation, booming economies of the 80’s and 90’s demonstrated

  1. Keynesian theory was correct
  2. Money Neutrality
  3. The success of activist policy
  4. The original single Phillips Curve had flaws
  5. All the above

13) As antibiotics were prescribed widely, bacteria grew to be antibiotic resistant. This is an example of what policy problem?

  1. Delays or lags
  2. Unintended consequences
  3. Mistakes
  4. None of the above

14) A patient suffering from a bad infection is prescribed an antibiotic. The person is allergic to the antibiotic and dies. This is an example of what policy problem?

  1. Delays or lags
  2. Unintended consequences
  3. Mistakes
  4. None of the above

15) A person falls sick, and after a couple of days, finally visits a doctor. The doctor diagnosis the person with the common cold and sends them home without any treatment. This is an example of what policy problem?

  1. Delays or lags
  2. Unintended consequences
  3. Mistakes
  4. None of the above

1)e. Neutrality says a change in the money supply and, in turn, inflation should have no real effects on the economy.

2)a. The early Keynesian theory believed in an inflation / unemployment trade-off.

3)a. The 1960’s saw rising inflation and falling unemployment. This lead economists to believe they could easily control and “fine tune” the economy.

4)e. With the observed trade-off in the 50’s and the apparent success of policy in the 60’s supported all of those ideas.

5)b. Stagflation, high unemployment and inflation at the same time, was contrary to the original Keynesian beliefs.

6)c. The idea that the Phillips Curve could shift upon people’s beliefs came out of the misperception theory. Even modern Keynesian theory now incorporates the idea of expectations in their theory.

7)c. The misperception theory says that only unexpected inflation will lower unemployment because it fools businesses into thinking there’s an increase in demand for their product.

8)d. The results of monetary policy depend completely upon what people expect to happen.

9)c. Neutrality theory says a change in the money supply should have no impact on the real economy

10)a. The original Keynesian theory sees a trade-off between inflation and unemployment

11)d. The result of monetary policy depends upon what people expect. So if the Fed loosens the money supply and injects more money, the effect on unemployment could be higher, lower, or the same depending upon what people expected the policy to be.

12)d. Much of the 80’s and much of the 90’s saw lower inflation rates coupled with falling unemployment. This is just the reverse of Stagflation. Those two results are incompatible with the original single Phillips Curve which saw a trade-off. This is why many started referring to the 90’s a new economy. Not a new economy, just looking at the world through an out-dated theory.

13)b. An unintended bad side effect of the wide use of antibiotics is an unintended consequence.

14)c. The doctor did not know the treatment would cause the patient to die

15)d. As long as the diagnosis was correct (no mistake) there is no policy mistake here. Doctors don’t have treatments for the common cold (other than rest and fluids and such). Even if the person had visited the doctor earlier, nothing would have changed.