Economics • Economic BasicsHard
What is the primary implication of the 'Friedman-Phelps Natural Rate Hypothesis' regarding the Phillips Curve?
A. There is a permanent, stable trade-off between inflation and unemployment in both the short run and long run.
B. In the long run, the Phillips curve is vertical at the natural rate of unemployment, implying no permanent trade-off between inflation and unemployment.✓ Correct Answer
C. Unemployment is entirely determined by nominal wage rigidities in the long run.
D. Monetary policy can permanently lower unemployment below its natural rate if inflation is kept constant.
💡 Solution & Explanation
The Friedman-Phelps hypothesis posits that adaptive inflation expectations render the long-run Phillips curve vertical at the natural rate of unemployment, eliminating permanent inflation-unemployment trade-offs. Short-run trade-offs may exist due to imperfect information, but macroeconomic stabilization policies cannot permanently alter real unemployment through inflation. Advanced economic theory questions on monetary policy rules frequently incorporate this hypothesis.
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