Question

Determine which of the given statements about inflation, unemployment, and the Phillips curve are true and which are false. E § By carefully monitoring the rate of money supply growth, policymakers can keep I the ecomony functioning at any infation-unemployment combination on the ≥ short-run Phillips curve. The cost of keeping unemployment below the natural rate of unemployment is accelerating inflation. Answer Bank In order to push unemployment below the natural rate, inflation must be lower than expected. true false Reducing unemployment is easier under adaptive expectations than it would be under rational expectations. Reducing inflation is easier under adaptive expectations than it would be under rational expectations.

Answer 1

Most of the statements are false, as they do not fully accommodate the neoclassical view of the long-run Phillips curve, which asserts a vertical relationship, indicating no trade-off between inflation and unemployment due to the natural rate adjustment. Keeping unemployment below the natural rate does lead to accelerating inflation, and reducing unemployment or inflation can be influenced by expectations whether they're adaptive or rational.

Step-by-step explanation:

To determine whether statements about inflation, unemployment, and the Phillips curve are true or false, we should refer to macroeconomic principles:

• By monitoring the rate of money supply growth, policymakers might aim to maintain a short-term position on the Phillips curve, yet the statement slightly mischaracterizes the long-run implications. While adjustments to the money supply can influence short-term unemployment and inflation rates, the long-run Phillips curve is vertical, indicating no trade-off between inflation and unemployment because of an adjustment to the natural rate of unemployment and potential GDP.
• It is true that keeping unemployment below the natural rate typically results in accelerating inflation as employers compete for scarce labor, increasing wages and consequently prices in a process known as 'wage-push' inflation.
• In order to push unemployment below the natural rate, inflation doesn't necessarily have to be lower than expected, as inflation can rise due to policies to reduce unemployment. This statement is false.
• Reducing unemployment under adaptive expectations might be easier compared to rational expectations because individuals expect future inflation to be the same as it has been in the past, which could lead to a slower response to policy changes, hence a slower return to the natural rate of unemployment.
• Reducing inflation is indeed typically easier under adaptive expectations than rational expectations, as people will adjust their expectations more slowly, providing a longer window for policy measures to take effect before inflation expectations rise.

It is important to note that consistently keeping unemployment below the natural rate is not sustainable in the long run without accelerating inflation, as per Milton Friedman's explanation of the neoclassical view of the long-run Phillips curve tradeoff.