Question

In macroeconomics courses in the 1960s and early​ 1970s, some economists argued that one of the U.S. political parties was willing to have higher unemployment in order to achieve lower inflation and that the other major political party was willing to have higher inflation in order to achieve lower unemployment. Such views of the​ trade-off between inflation and unemployment might have existed in the 1960s because the Phillips curve was widely viewed as A. upward sloping. B. vertical. C. stable. D. horizontal. Such views are rare today because A. both political parties agree that higher inflation is acceptable if it means lower unemployment. B. the Phillips curve has been found to be upward sloping. C. in the long run there is no tradeoff between inflation and unemployment. D. the Phillips curve is viewed as a policy menu and a stable relationship.

Answer 1

For the first question, none of the answers provided are correct. The Phillips Curve is in fact downward-sloping, with the Y-axis representing inflation, and the x-axis represented unemployment. According to this curve, higher inflation leads to lower unemployment, hence, both variables are inversely proportional, and thus, the curve is downward sloping.

I have attached a picture of the Phillips Curve where this can be seen clearly.

For the second question, the correct answer is C) In the long run there is no tradeoff between inflation and unemployment.

The trade-off between inflation and unemployment only exists in the short-term. This was demonstrated by the stagflation period that affected the United States during the 1970s. During stagflation, unemployment is high, inflation is high, and economic growth is low.

The reason why this trade-off does not exist in the long run is the future expectations of economic agents. The fact is that the Phillips Curve model did not take into account this expectations.

When inflation is high, and economic agents expect it to rise even more, they invest less because interest rates will be higher and loans more expensive, and consumers will consume more and save less because money will lose value faster as inflation rises. This scenario causes less economic activity and ultimately leads to stagflation.