Question

on the previous graph, place the black cross point to illustrate the situation when people underestimate inflation by 2%.when people underestimate inflation, the resulting unemployment rate is the natural rate.true or false: the modern view of the phillips curve indicates that to keep the unemployment rate low, policymakers should follow policies consistent with low and steady inflation.truefalse

Answer 1

The modern view of the Phillips curve suggests that there is no long-term trade-off between inflation and unemployment, and to maintain low unemployment in the long run, policies should aim for low and steady inflation.

Step-by-step explanation:

The question pertains to the Phillips curve, which depicts an inverse relationship between inflation and unemployment. When people underestimate inflation by 2%, the actual inflation is higher than their expectations. However, this does not guarantee that the unemployment rate will be at the natural rate, since other factors could influence the actual unemployment rate.

False: Modern economic theory suggests that there is no long-term trade-off between inflation and unemployment. In the short term, policy measures aiming to reduce inflation may lead to higher unemployment, but over the long term, the relationship becomes vertical (no trade-off) at the natural rate of unemployment. Therefore, the modern view of the Phillips curve indicates that to maintain low unemployment in the long run, policymakers should pursue policies that ensure low and steady inflation.