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Choosing a point on the Phillips Curve, and conducting monetary and fiscal policy so that the economy gets to that combination of unemployment and inflation is not always a viable strategy. Why?

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Richa Arora
Richa AroraLv10
28 Sep 2019
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Related questions

Assuming people have rational expectations:
 
A) Monetary policy changes will cause the money supply to change, thereby causing changes in inflation and unemployment along a vertical Phillips Curve

B) When the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect the real GDP

C) When the government uses fiscal policy, then changes in the money supply will create quick adjustments in wages and prices which will not cause changes in real GDP

D) When the Fed uses monetary policy, people do not quickly adjust wages and prices, therefore, inflation will deviate from expectations and create fluctuations in real GDP

1) In 1958, A.W. Phillips stated that inflation and unemployment are correlated. In 1972, Milton Friedman stated that Phillips' relationship was only temporary, and thus only applicable in the short-run. Friedman contended that people will over time anticipate the correct value of inflation and in the meantime adjust their actions accordingly. These expectations mitigate policymakers' attempts to control unemployment through inflationary policies. Thus, Friedman believed that in the long-run, there is no relationship between inflation and unemployment. Friedman's analysis of inflation and unemployment is summarized by the following equation: equation, where a is a positive constant, and the natural rate of unemployment is the normal unemployment that an economy experiences because people are continually quitting and searching for jobs.

Which of the answer choices is Phillips' theory regarding inflation and unemployment?

A. More people working in an economy correlates to more expensive goods and services.

B. Fewer people looking for work in an economy correlates to cheaper goods and services.

C. More people looking for work in an economy correlates to more expensive goods and services.

D. Fewer people working in an economy correlates to more expensive goods and services.

2) At the end of 2014, the unemployment rate in the U.S. was 5%. The Federal Reserve has stated that it will conduct monetary policy to bring down this unemployment rate during 2015. Suppose that the natural rate of unemployment is 6%, the value of a is one, and the public expects inflation of 4%. According to the given information, which of the answer choices correctly gives values of actual inflation that would support Phillips's theory and Friedman's theory, respectively?

A. Phillips: 6%; Friedman: 5%

B. Phillips: 7%; Friedman: 6%

C. Phillips: 5%; Friedman: 2%

D. Phillips: 3%; Friedman: 4%

1. Some people will argue against using either monetary or fiscal policy, instead of supporting a laissez-faire approach to the economy. The well-known economist Milton Friedman, for example, believed in the permanent income hypothesis and was also a monetarist. What monetary policy prescription do monetarists support? 

2.The Phillips curve shows an important tradeoff faced by economic policymakers. This tradeoff was used to point out the legitimacy of government intervention in the economy for many years.

a. What is the Phillips curve? What does it show? Why is it important to economic policymakers?

b. The tradeoff demonstrated by the Phillips curve seemed to fail during the 1970s. Why? What happened? 

c. What is the currently accepted belief about the Phillips curve? Hint: This question has to do with the long-run versus the short run. 

 

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