During the 1970s when both the unemployment rate and inflation rate rose, it is reasonable to conclude that
A) both the short-run and long-run Phillips curves shifted rightward.
B) only the short-run Phillips curve shifted.
C) only the long-run Phillips curve shifted.
D) both the short-run and long-run Phillips curves shifted leftward.

Question

Quizplus · Accepted Answer

The simultaneous increase in both unemployment and inflation during the 1970s suggests a shift to the right on both the short-run and long-run Phillips curves. This is because the relationship between unemployment and inflation changed, indicating a decrease in aggregate supply and an increase in the natural rate of unemployment in the long run. The short-run Phillips curve would also shift rightward as firms raise prices to compensate for increased production costs, leading to higher inflation at any given level of unemployment.

During the 1970s When Both the Unemployment Rate and Inflation