Question

Many economists during the 1960s believed the implications of the Phillips curve, which
A. indicated that low unemployment was associated with high inflation and high unemployment was
associated with low inflation.
B. offered policymakers a menu of possible economic outcomes from which to choose and the choice for
expansionary policy would lead to inflationary pressure but reduced unemployment.
C. indicated that there was upward pressure on wages and prices when unemployment was high.
D. All of the above are correct.
E. A and B, only

11. Which of the following would a student of economics expect if government policy had moved the economy
up along a given short-run Phillips curve?
A. Roscoe reads in the newspaper that the central bank had been increasing the purchase of bonds.
B. Bernadette loses her job because the factory shut down due to declining economic conditions.
C. Jasmine’s nominal wage falls because the manager, filled with jealousy, is stealing her tips.
D. Tim the “tool guy” cuts prices at his hardware store because of falling sales.
E. Both B and D

Answer 1

1.(E) A and B only

Option A is correct since Philips curve was hypothised by empirical testing which showed inverse relation beween unemployment and inflation.

Option B depicts the mechanism behing Philips curve.The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. Since expansionary policies increase economic growth, they set off this cycle.

Option C is incorrect since there is downward pressure on wages and prices when unemployment is high.

2. (A.) Roscoe reads in the newspaper that the central bank had been increasing the purchase of bonds.

A movement up along the short run Philips curve means high inflation and low unemployment ( since the curve is downward sloping). Opton A is correct since when central bank purchases bonds, it is an expansionary monetary policy. This increases money supply in the economy as a consequence inflation also increases while unemployment decreases due to the expansionary nature of the policy.

Option B is incorrect since it implies increases unemployment. In reality the unemployment has decreased.

Option C is incorrect since it relates to psychological nature of the manager and not economic conditions

Option D is incorrect since increase in money supply means increase in consumption and production of goods, that is, more sales and not lesser sales.