Question

Explain Milton Friedman’s Phillips Curve relationship and how it relates to the FED’s inflation-target policy (e.g. NAIRU).

Answer 1

Milton Friedman with Edmund phelps discovered in the 1970s that the negative relationship between inflation rate and unemployment rate holds only in the short run not in the long run.They emphasized on the role of adaptive expectations in predicting the rate of Inflation and argued that economic agents consider past inflation rates while forming inflation expectations.Thus,they don't repeat the same mistake of incorrectly predicting inflation rate.The philips curve is thus vertical at the natural rate of unemployment in the long run.

answered by: anonymous