AP Macro Phillips Curve 1 — Questions and Answers
Question 1: The Phillips Curve illustrates the short-run relationship between which two macroeconomic variables?
- GDP growth and interest rates
- Inflation and unemployment (Correct answer)
- Money supply and interest rates
- Exports and imports
Correct answer: Inflation and unemployment
The Phillips Curve shows the inverse relationship between the inflation rate and the unemployment rate in the short run.
Question 2: Along the short-run Phillips Curve (SRPC), when unemployment decreases, inflation tends to:
- Decrease
- Remain constant
- Increase (Correct answer)
- Turn negative (deflation)
Correct answer: Increase
The SRPC shows an inverse relationship — lower unemployment corresponds to higher inflation as demand for labor drives up wages and prices.
Question 3: What does the Non-Accelerating Inflation Rate of Unemployment (NAIRU) represent on a Phillips Curve diagram?
- The inflation rate when unemployment is zero
- The unemployment rate consistent with stable inflation (Correct answer)
- The maximum possible unemployment rate in an economy
- The minimum inflation rate a central bank can achieve
Correct answer: The unemployment rate consistent with stable inflation
NAIRU is the unemployment rate at which inflation neither accelerates nor decelerates, representing the long-run equilibrium unemployment rate.
Question 4: If the economy is operating below the NAIRU, which of the following is most likely to occur over time?
- Deflation
- Rising unemployment
- Accelerating inflation (Correct answer)
- Decreasing interest rates
Correct answer: Accelerating inflation
Below the NAIRU, the labor market is overly tight, creating sustained upward wage pressure that causes inflation to accelerate over time.
Question 5: The concept of 'stagflation' in the 1970s challenged the simple Phillips Curve because it demonstrated that:
- Unemployment and inflation cannot coexist in any economy
- High inflation and high unemployment can occur simultaneously (Correct answer)
- The Phillips Curve slope was steeper than economists originally believed
- Unemployment always causes deflation in the long run
Correct answer: High inflation and high unemployment can occur simultaneously
Stagflation — simultaneous high inflation and high unemployment — contradicted the original Phillips Curve's inverse relationship between the two variables.
Question 6: Which economists are primarily credited with developing the expectations-augmented Phillips Curve in the late 1960s?
- John Maynard Keynes and Paul Samuelson
- Milton Friedman and Edmund Phelps (Correct answer)
- A.W. Phillips and Robert Solow
- Paul Volcker and Alan Greenspan
Correct answer: Milton Friedman and Edmund Phelps
Milton Friedman and Edmund Phelps independently argued that inflation expectations shift the short-run Phillips Curve, making the long-run curve vertical.
Question 7: A.W. Phillips originally developed the Phillips Curve relationship using wage and unemployment data from which country?
- United States
- Germany
- Japan
- United Kingdom (Correct answer)
Correct answer: United Kingdom
A.W. Phillips developed the curve in 1958 using nearly 100 years of UK wage inflation and unemployment data.
AP Macro Phillips Curve 1
The Phillips Curve illustrates the short-run relationship between which two macroeconomic variables?