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Phillips Curve and Expected Inflation quiz

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  • What does the short run Phillips Curve illustrate about the relationship between inflation and unemployment?
    It shows an inverse relationship, meaning as inflation increases, unemployment decreases in the short run.
  • How does the long run Phillips Curve depict the relationship between inflation and unemployment?
    It shows no relationship; regardless of inflation, unemployment returns to the natural rate in the long run.
  • What happens to real wages when actual inflation exceeds expected inflation?
    Real wages decrease because the purchasing power of workers' pay is eroded more than anticipated.
  • Why might firms hire more workers when actual inflation is higher than expected?
    Because real wages are lower, making labor cheaper, which increases profits and encourages more hiring.
  • What causes the short run Phillips Curve to shift to the right?
    An increase in expected inflation causes the short run Phillips Curve to shift rightward.
  • At what point do the short run and long run Phillips Curves intersect?
    They intersect where actual inflation equals expected inflation.
  • According to rational expectations theory, how do people form expectations about inflation?
    People use all available information to make informed predictions about future inflation.
  • What is the difference between nominal wage and real wage?
    Nominal wage is the dollar amount paid to workers, while real wage is the purchasing power of that wage after adjusting for inflation.
  • What happens to unemployment when actual inflation is less than expected inflation?
    Unemployment increases because real wages are higher than firms expected, making labor more expensive.
  • How does a persistent difference between actual and expected inflation affect expected inflation?
    If actual inflation remains higher than expected, people will eventually adjust their expectations upward.
  • Why does the short run Phillips Curve make accurate predictions in the short run?
    Because deviations between actual and expected inflation temporarily affect unemployment.
  • What must happen for the economy to return to the long run Phillips Curve after a period of unexpected inflation?
    Expected inflation must adjust to match the new actual inflation rate.
  • How does a decrease in expected inflation affect the short run Phillips Curve?
    It shifts the short run Phillips Curve to the left.
  • Why do the predictions of the short run and long run Phillips Curves differ?
    The short run curve accounts for deviations due to unexpected inflation, while the long run curve assumes expectations are correct.
  • What is the natural rate of unemployment according to the long run Phillips Curve?
    It is the unemployment rate the economy returns to regardless of the inflation rate in the long run.