Events & Promotions
|
|
GMAT Club Daily Prep
Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.
Customized
for You
Track
Your Progress
Practice
Pays
Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.
May 1212:00 PM EDT
-11:59 PM EDT
Make the most of your break with the most realistic GMAT™ prep. Take up to $700 off select products.
May 1501:00 PM IST
-11:00 AM IST
Start your journey with a fully customized action plan and work with a dedicated mentor to achieve a 735+ score.
May 1810:00 AM PDT
-11:00 AM PDT
Join us in a live GMAT practice session and solve 25 challenging GMAT questions with other test takers in timed conditions, covering GMAT Quant, Data Sufficiency, Data Insights, Reading Comprehension, and Critical Reasoning questions.- May 19
12:00 PM PDT
-01:00 PM PDT
Scoring 329 on the GRE is not always about using more books, more courses, or a longer study plan. In this episode of GRE Success Talks, Ashutosh shares his GRE preparation strategy, study plan, and test-day experience, explaining how he kept his prep.... - Jun 10
06:00 AM PDT
-06:15 PM PDT
Register for the GMAT Club Virtual MBA Spotlight Fair – the world’s premier event for serious MBA candidates. This is your chance to hear directly from Admissions Directors at nearly every Top 30 MBA program..
10 Oct 2025, 22:13
Kudos
Bookmarks
In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
Based on the passage, which of the following would a government that accepted the Phillips Curve framework in the 1960s most likely have done?
A. Maintained a fixed monetary supply to prevent expectations of inflation from developing
B. Anticipated an increase in unemployment levels as a result of increase in inflation levels
C. Allowed inflation to rise temporarily, believing it would keep output from falling and unemployment from climbing later.
D. Lowered interest rates even at the risk of higher inflation to reduce unemployment
E. Incorporated household and business expectations, productivity trends, and supply shocks to create a rounded fiscal policy
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
Based on the passage, which of the following would a government that accepted the Phillips Curve framework in the 1960s most likely have done?
A. Maintained a fixed monetary supply to prevent expectations of inflation from developing
B. Anticipated an increase in unemployment levels as a result of increase in inflation levels
C. Allowed inflation to rise temporarily, believing it would keep output from falling and unemployment from climbing later.
D. Lowered interest rates even at the risk of higher inflation to reduce unemployment
E. Incorporated household and business expectations, productivity trends, and supply shocks to create a rounded fiscal policy
10 Oct 2025, 22:13
Kudos
Bookmarks
Official Solution:
In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
Based on the passage, which of the following would a government that accepted the Phillips Curve framework in the 1960s most likely have done?
A. Maintained a fixed monetary supply to prevent expectations of inflation from developing
B. Anticipated an increase in unemployment levels as a result of increase in inflation levels
C. Allowed inflation to rise temporarily, believing it would keep output from falling and unemployment from climbing later.
D. Lowered interest rates even at the risk of higher inflation to reduce unemployment
E. Incorporated household and business expectations, productivity trends, and supply shocks to create a rounded fiscal policy
A) Incorrect. In the 1960s policymakers still viewed the Phillips Curve as a stable trade-off and paid little attention to inflation expectations. A strict “fixed monetary supply” policy aimed at blocking expectations belongs to the later, expectations-augmented view developed in the 1970s, not to the framework then in favor.
B) Incorrect. The original Phillips Curve implied that higher inflation would move unemployment down, not up. A government that believed in the 1960s version would expect the inverse relationship, so anticipating higher joblessness alongside rising prices runs against the framework.
C) Incorrect. Allowing temporary inflation “to keep output from falling later” hints at managing future downturns through pre-emptive price rises. The 1960s policy focus was more direct: accept higher inflation now in return for lower unemployment now. The passage does not say governments expected that extra inflation would prevent later output slumps; it simply says they saw a current trade-off.
D) Correct Answer. The text reports that the Phillips Curve “informed expansionary fiscal and monetary strategies.” Expansionary monetary policy means lowering interest rates or expanding money supply, fully aware this would push prices higher, in order to bring unemployment down. Choosing to cut rates despite the risk of faster inflation matches the 1960s policy stance exactly.
E) Incorrect. Incorporating expectations, productivity, and supply shocks reflects the modern version of the Phillips Curve, developed after stagflation exposed flaws in the original model. A government thinking in 1960s terms would not yet weave these factors into policy.
Answer: D
In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
Based on the passage, which of the following would a government that accepted the Phillips Curve framework in the 1960s most likely have done?
A. Maintained a fixed monetary supply to prevent expectations of inflation from developing
B. Anticipated an increase in unemployment levels as a result of increase in inflation levels
C. Allowed inflation to rise temporarily, believing it would keep output from falling and unemployment from climbing later.
D. Lowered interest rates even at the risk of higher inflation to reduce unemployment
E. Incorporated household and business expectations, productivity trends, and supply shocks to create a rounded fiscal policy
A) Incorrect. In the 1960s policymakers still viewed the Phillips Curve as a stable trade-off and paid little attention to inflation expectations. A strict “fixed monetary supply” policy aimed at blocking expectations belongs to the later, expectations-augmented view developed in the 1970s, not to the framework then in favor.
B) Incorrect. The original Phillips Curve implied that higher inflation would move unemployment down, not up. A government that believed in the 1960s version would expect the inverse relationship, so anticipating higher joblessness alongside rising prices runs against the framework.
C) Incorrect. Allowing temporary inflation “to keep output from falling later” hints at managing future downturns through pre-emptive price rises. The 1960s policy focus was more direct: accept higher inflation now in return for lower unemployment now. The passage does not say governments expected that extra inflation would prevent later output slumps; it simply says they saw a current trade-off.
D) Correct Answer. The text reports that the Phillips Curve “informed expansionary fiscal and monetary strategies.” Expansionary monetary policy means lowering interest rates or expanding money supply, fully aware this would push prices higher, in order to bring unemployment down. Choosing to cut rates despite the risk of faster inflation matches the 1960s policy stance exactly.
E) Incorrect. Incorporating expectations, productivity, and supply shocks reflects the modern version of the Phillips Curve, developed after stagflation exposed flaws in the original model. A government thinking in 1960s terms would not yet weave these factors into policy.
Answer: D
