Question

Can policymakers exploit the Phillips curve relationship by trading more inflation for less unemployment in the short​ run? In the long​ run? Explain both the classical and Keynesian points of view.

A. Classicals say the tradeoff exists in neither the short run nor the long​ run; Keynesians say there is a tradeoff in the short run but not in the long run.
B. Classicals say the tradeoff exists in the short run but not in the long​ run; Keynesians also say there is a tradeoff in the short run but not in the long run.
C. Classicals say the tradeoff exists in the short run but not in the long​ run; Keynesians say there is a tradeoff in both the short run and the long run.
D. Keynesians say the tradeoff exists in neither the short run nor the long​ run; Classicals say there is a tradeoff in the short run but not in the long run.

Answer 1

The Phillips curve indicates a short-run tradeoff between inflation and unemployment that Keynesians argue can be exploited by policymakers, but in the long run, both Keynesians and Classical economists agree that the tradeoff does not exist.

Step-by-step explanation:

The correct answer is that Classical say the tradeoff exists in the short run but not the long​ run; Keynesians also say there is a tradeoff in the short run but not in the long run. The Phillips curve depicts an inverse relationship between the rate of inflation and the rate of unemployment. In the short run, Keynesians argue that it is possible for policymakers to navigate this tradeoff to reduce unemployment through expansionary monetary policy, which tends to increase inflation.

However, in the long run, both Keynesians and Classical economists agree that this tradeoff does not exist because expectations adjust, making any attempt to exploit the Phillips curve fruitless as it will only result in inflation, with unemployment returning to its natural rate. This is due to the natural rate hypothesis suggested by Milton Friedman and Edmund Phelps, which posits that economy will adjust back to the natural rate of unemployment over time regardless of inflation levels.