Question

According to the modern view of the Phillips curve, expansionary macroeconomic policy that leads to inflation will reduce unemployment

a. only if people underestimate the inflationary side effects of the policy.

b. only if people overestimate the inflationary side effects of the policy.

c. if people accurately anticipate the inflationary side effects of the policy.

d. only if monetary policy provides the macroeconomic stimulus.

Answer 1

a. only if people underestimate the inflationary side effects of the policy.

Step-by-step explanation:

The modern Phillips curve suggests that as inflation increases, unemployment reduces and vice versa dependent on two factors; the level of inflation and the excess of growth rate of wages over the expected inflation. The larger the excess, the greater the effect of the expansionary monetary policy. Thus, if it is underestimated, then the unemployment will greatly reduce.