Question

which of the following statements is not a premise associated with the Phillips curve?
a) the Phillips curve is applicable in both the short run and long run.
b) the Phillips curve can be viewed as a policy menu, a nation could choose low inflation and high unemployment, or high inflation and low unemployment, or anywhere in between
c) when unemployment is low, employers have trouble attracting workers, so they raise wages faster inflation in wages soon turns into inflation in the prices of goods and services.
d) there is inverse relationship between unemployment and inflation in the short run.

Answer 1

Option B

Philips curve was viewed as policy menu during 1960 . During the 1960s, the Phillips curve was seen as a policy menu. A nation could choose low inflation and high unemployment, or high inflation and low unemployment, or anywhere in between. Fiscal and monetary policy could be used to move up or down the Phillips curve as desired.

But when policymakers tried to exploit the tradeoff between inflation and unemployment, the result was an increase in both inflation and unemployment. This pattern is called stagflation. The stagflation was observed in mid 1970's due to supply shocks which occured as a result of oil crisis and it can occur due to change in change in inflationary expectations of people.

answered by: anonymous