AP Macroeconomics chapter practice15 questions

18 The Phillips Curve: Inflation, Unemployment, and Shocks

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Aggregate demand expands while expected inflation holds steady. Which of the following describes the short-run result on the short-run Phillips curve (SRPC)?

With expectations pinned down, stronger spending buys lower unemployment at the cost of higher inflation, and that trade is a slide along the curve already drawn. A and C turn a movement into a shift, and C moves the long-run curve besides, which expectations alone cannot do. D reverses the unemployment effect, and E denies that any inflation results.
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B. Lower unemployment and higher inflation along the SRPC

With expectations pinned down, stronger spending buys lower unemployment at the cost of higher inflation, and that trade is a slide along the curve already drawn. A and C turn a movement into a shift, and C moves the long-run curve besides, which expectations alone cannot do. D reverses the unemployment effect, and E denies that any inflation results.

Question 2

Question 2 of 15

On a Phillips-curve diagram, the economy is operating to the right of the long-run Phillips curve. Which condition does that position represent?

The LRPC is vertical at the natural rate. A point to its right has unemployment above the natural rate and output below potential, which is a recessionary gap. Choice A places the economy on the wrong side. Choice B describes the LRPC itself rather than the stated point. Choice D is a curve-shift story, and Choice E concerns productive capacity rather than the unemployment location shown.
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C. A recessionary gap with unemployment above the natural rate

The LRPC is vertical at the natural rate. A point to its right has unemployment above the natural rate and output below potential, which is a recessionary gap. Choice A places the economy on the wrong side. Choice B describes the LRPC itself rather than the stated point. Choice D is a curve-shift story, and Choice E concerns productive capacity rather than the unemployment location shown.

Question 3

Question 3 of 15

The long-run Phillips curve is drawn as a vertical line. That line sits at

Expectations catch up in the long run, so unemployment settles at the rate produced by search and mismatch no matter which inflation rate the economy has adopted. B and C put a vertical line at a value of inflation, which locates nothing on the unemployment axis. A reads full employment as zero unemployment, though search and mismatch persist even at potential output, and E treats the natural rate as a record low rather than an equilibrium.
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D. the natural rate of unemployment

Expectations catch up in the long run, so unemployment settles at the rate produced by search and mismatch no matter which inflation rate the economy has adopted. B and C put a vertical line at a value of inflation, which locates nothing on the unemployment axis. A reads full employment as zero unemployment, though search and mismatch persist even at potential output, and E treats the natural rate as a record low rather than an equilibrium.

Question 4

Question 4 of 15

An adverse supply shock strikes the economy. Which of the following describes its effect on the short-run Phillips curve (SRPC)?

Higher production costs worsen the whole menu: every unemployment rate now comes with more inflation than it did before. B moves the curve the wrong way, A treats a shift as movement along a fixed curve, D reverses both variables at once, and C promotes a temporary cost shock into a change in the natural rate.
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E. The SRPC shifts up and to the right.

Higher production costs worsen the whole menu: every unemployment rate now comes with more inflation than it did before. B moves the curve the wrong way, A treats a shift as movement along a fixed curve, D reverses both variables at once, and C promotes a temporary cost shock into a change in the natural rate.

Question 5

Question 5 of 15

Inflation can start on either side of the aggregate market. Which of the following produces demand-pull inflation?

Demand-pull inflation appears when total spending outruns what the economy can supply, which is what a rightward demand shift does. B has the right curve and the wrong direction, and would pull prices down. C is the cost-push case, D adds capacity and eases price pressure, and E moves a schedule in the money market rather than the goods market.
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A. A rightward shift of aggregate demand

Demand-pull inflation appears when total spending outruns what the economy can supply, which is what a rightward demand shift does. B has the right curve and the wrong direction, and would pull prices down. C is the cost-push case, D adds capacity and eases price pressure, and E moves a schedule in the money market rather than the goods market.

Question 6

Question 6 of 15

A nationwide rise in unit production costs pushes the price level up while real output falls. The initiating disturbance is classified as

Prices up with output down is the fingerprint of a supply shift, since a demand change moves the two together. A reverses the sign of the shock. B and E are demand changes, and each gets one variable right and the other backwards: a contraction lowers prices along with output, an expansion raises output along with prices. C would slow inflation rather than raise it.
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D. an adverse supply shock

Prices up with output down is the fingerprint of a supply shift, since a demand change moves the two together. A reverses the sign of the shock. B and E are demand changes, and each gets one variable right and the other backwards: a contraction lowers prices along with output, an expansion raises output along with prices. C would slow inflation rather than raise it.

Question 7

Question 7 of 15

A favorable supply shock lowers firms' unit production costs. Which Phillips-curve result is most likely?

Lower unit costs let firms produce more with less inflation pressure, so the SRPC shifts down and left. Choice A is movement caused by stronger demand. Choice C changes the natural rate without a labor-market cause. Choice D gives the adverse-shock result, and Choice E is movement caused by weaker demand rather than a supply shift.
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B. The SRPC shifts down and left, allowing lower inflation and lower unemployment.

Lower unit costs let firms produce more with less inflation pressure, so the SRPC shifts down and left. Choice A is movement caused by stronger demand. Choice C changes the natural rate without a labor-market cause. Choice D gives the adverse-shock result, and Choice E is movement caused by weaker demand rather than a supply shift.

Question 8

Question 8 of 15

Which event shifts the long-run Phillips curve to the right?

More structural unemployment raises the natural rate, so the vertical LRPC shifts right. Choices B and C move the economy along an SRPC because they are demand changes. Choice D shifts the SRPC temporarily, not the natural rate. Choice E reduces cyclical unemployment but does not by itself change frictional or structural unemployment.
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A. An increase in structural unemployment that raises the natural rate

More structural unemployment raises the natural rate, so the vertical LRPC shifts right. Choices B and C move the economy along an SRPC because they are demand changes. Choice D shifts the SRPC temporarily, not the natural rate. Choice E reduces cyclical unemployment but does not by itself change frictional or structural unemployment.

Question 9

Question 9 of 15

A contraction of aggregate demand affects an economy initially on its short-run Phillips curve by causing

Weaker aggregate demand lowers inflation and raises cyclical unemployment, producing movement down and right along the existing SRPC. Choices A and E incorrectly shift the SRPC. Choice B moves the natural rate without a structural cause. Choice D gives the direction for an expansion of aggregate demand.
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C. movement down and right along the SRPC

Weaker aggregate demand lowers inflation and raises cyclical unemployment, producing movement down and right along the existing SRPC. Choices A and E incorrectly shift the SRPC. Choice B moves the natural rate without a structural cause. Choice D gives the direction for an expansion of aggregate demand.

Question 10

Question 10 of 15

A job-matching reform reduces the time unemployed workers spend finding suitable openings. What is the most likely Phillips-curve effect?

Better matching reduces frictional unemployment and therefore lowers the natural rate, shifting the LRPC left. Choice A reverses that effect. Choice B claims a cost shock that the reform does not create. Choice C treats a natural-rate change as movement along a fixed curve, and Choice D changes the LRPC's shape rather than its position.
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E. The natural rate falls and the LRPC shifts left.

Better matching reduces frictional unemployment and therefore lowers the natural rate, shifting the LRPC left. Choice A reverses that effect. Choice B claims a cost shock that the reform does not create. Choice C treats a natural-rate change as movement along a fixed curve, and Choice D changes the LRPC's shape rather than its position.

Question 11

Question 11 of 15

On a short-run Phillips curve, a movement up and to the left is produced by

Up and to the left means inflation rising while unemployment falls, and stronger spending along a given curve delivers exactly that pair. B moves along the same curve in the opposite direction. A, C, and D shift the curve instead of producing movement along it, and all three shift it downward.
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E. an expansion of aggregate demand

Up and to the left means inflation rising while unemployment falls, and stronger spending along a given curve delivers exactly that pair. B moves along the same curve in the opposite direction. A, C, and D shift the curve instead of producing movement along it, and all three shift it downward.

Question 12

Question 12 of 15

A sustained fall in imported energy costs is best represented on a Phillips-curve diagram by

Cheaper energy is a favorable supply shock, so inflation and unemployment are lower at each corresponding short-run condition and the SRPC shifts down and left. Choices A and C describe movements caused by demand changes. Choice B moves the natural rate without a labor-market change. Choice E gives the direction for an adverse supply shock.
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D. a downward and leftward shift of the SRPC

Cheaper energy is a favorable supply shock, so inflation and unemployment are lower at each corresponding short-run condition and the SRPC shifts down and left. Choices A and C describe movements caused by demand changes. Choice B moves the natural rate without a labor-market change. Choice E gives the direction for an adverse supply shock.

Question 13

Question 13 of 15

Real output equals potential output and unemployment sits at its natural rate. Cyclical unemployment is

The natural rate is defined to leave out unemployment caused by too little demand, so at potential output that component is nothing. Frictional and structural unemployment stay behind, which is what D and E miss by folding everything into the cyclical part. A misfiles frictional unemployment as cyclical, and B has the sign wrong and measures the gap in output rather than in unemployment.
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C. zero, though other types remain

The natural rate is defined to leave out unemployment caused by too little demand, so at potential output that component is nothing. Frictional and structural unemployment stay behind, which is what D and E miss by folding everything into the cyclical part. A misfiles frictional unemployment as cyclical, and B has the sign wrong and measures the gap in output rather than in unemployment.

Question 14

Question 14 of 15

Why is the long-run Phillips curve vertical at the natural rate of unemployment?

In the long run, demand policy can determine the inflation rate but cannot keep unemployment away from the natural rate, so the LRPC is vertical there. Choice B invents an automatic reversal of demand. Choice C makes the natural rate follow temporary cyclical conditions. Choice D incorrectly requires the price level to fall back, and Choice E mistakes full employment for zero unemployment.
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A. In the long run, changes in aggregate demand affect inflation but do not permanently move unemployment away from its natural rate.

In the long run, demand policy can determine the inflation rate but cannot keep unemployment away from the natural rate, so the LRPC is vertical there. Choice B invents an automatic reversal of demand. Choice C makes the natural rate follow temporary cyclical conditions. Choice D incorrectly requires the price level to fall back, and Choice E mistakes full employment for zero unemployment.

Question 15

Question 15 of 15

A labor-market reform reduces skill mismatch among workers and available jobs. Which result is most likely?

Less skill mismatch reduces structural unemployment and the natural rate, shifting the LRPC left. Choice A reverses the direction. Choice C denies that the natural rate changed. Choice D invents a rise in production costs, and Choice E misclassifies structural unemployment as cyclical.
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B. The natural rate falls and the LRPC shifts left.

Less skill mismatch reduces structural unemployment and the natural rate, shifting the LRPC left. Choice A reverses the direction. Choice C denies that the natural rate changed. Choice D invents a rise in production costs, and Choice E misclassifies structural unemployment as cyclical.

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