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Phillips Curve and Exchange Rate

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The price level in the economy between 2007 and 2008 rose from 100 to 105. Between 2008 and 2009, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?
A) The unemployment rate will decrease since inflation decreased.
B) The unemployment rate will decrease since inflation increased.
C) The unemployment rate will increase since inflation increased.
D) The unemployment rate would not change since there is no change in the rate of inflation.

You are traveling in Ireland and are thinking about buying a new digital camera. You have decided that you would be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you are looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera? (Assume no taxes or duties are associated with the purchase.)
A) 0.56 euros per dollar
B) 0.89 euros per dollar
C) 0.92 euros per dollar
D) You would purchase the new camera at any of the above exchange rates

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Solution Summary

The price level in the economy between 2007 and 2008 rose from 100 to 105. Between 2008 and 2009, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?

You are traveling in Ireland and are thinking about buying a new digital camera. You have decided that you would be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you are looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera?

Solution Preview

First answer - B, the Philips curve postulates an inverse relationship between prices ...

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