1) The problem that the original Phillips curve could not explain was
a. The natural rate hypothesis
b. Hyper-inflation
c. Stagflation
d. Disinflation
e. Misery index
2) The Fed announces that it is going to reduce the inflation rate. If, as inflation decreases, unemployment rises, then we know
a. The Phillips curve shifted up
b. The Phillips curve shift down
c. Unemployment was at its natural rate
d. People didn’t believe the Fed
e. Rational expectations were based on the misery index, not the natural rate
3) The Fed increases the money supply. Inflation rises, but the unemployment rate stays the same.
a. Money was neutral
b. People must have expected the inflation rate to increase
c. The Phillips Curve must have shifted upward
d. The result in the short run is the same as the result in the long run
e. All of the above
4) In the 1960’s, the inflation rate rose and unemployment fell. This led economists to believe
a. Money is neutral
b. The original Phillips Curve was true and Keynesian theory was correct
c. The economy was hit with bad supply shocks
d. Stagflation had begun
e. The Phillips Curve was really vertical
5) Some economists suggest that the Fed should follow set rules policy in order to
a. Avoid an inflationary bias
b. Avoid political rent seeking
c. Reduce real interest rates
d. Better control business cycles
e. Promote long run growth as opposed to short run, temporary gains in lower unemployment
6) Fiscal Policy maybe ineffective in stabilizing business cycles because
a. Deficits may not stimulate Aggregate Demand
b. Decisions may take too long to make
c. Political cycles will arise and just make things worse
d. Recessions may not be caused as theory predicts
e. All the above
7) Congress gives a special tax break to publishing industry who had donated large sums of money to the recent campaign. The publishing industry was doing what?
a. Creating an inflationary bias
b. Deficit Spending
c. Discretionary Spending
d. Rent Seeking
e. Political log rolling
8) What do policymakers need to know to conduct successful economic policy?
a. The correct state of the economy
b. The correct cause of business cycles
c. What affect the deficit has upon an economy
d. What people are expecting the government to do
e. All of the above
Answers:
1) c. Originally, the Phillips curve suggested an inflation / unemployment tradeoff. Stagflation had both high inflation and high unemployment which could not be explained. That’s when the concept of expectations and the shifting of the Phillips curve was introduced.
2) d. Modern theory PC theory suggests that rising unemployment can be avoided when there’s disinflation if people adjust their inflation expectation lower. That must not have happened in this case.
3) e. If inflation rises but unemployment doesn’t change, then people adjust their expectation upward with the change in inflation. This is the same as the PC Curve shifting upward, money’s neutral, and the short run result is the same as the long run.
4) b. An inflation / unemployment tradeoff was evident in the 1960’s. This led economists to believe that the Phillips Curve was an accurate description of the way the economy worked. It also led them to believe there would never be another recession.
5) a. Economists have argued that a discretionary monetary policy will lead to high inflation as the Fed tries to manipulate unemployment lower.
6) e. All of those are reasons fiscal policy may not be desirable and be ineffective in stabilizing the economy
7) d. Getting favors out of politicians in exchange for money/votes/volunteers is referred to as “political rent seeking.”
8) e. All are examples of information that policymakers must know accurately to successful conduct economic policy.