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.

Question

Quizplus · Accepted Answer

The modern view of the Phillips curve suggests that there is no stable trade-off between inflation and unemployment in the long run. In the short run, an expansionary macroeconomic policy that leads to inflation may temporarily reduce unemployment, but only if people underestimate the inflationary side effects of the policy. If people accurately anticipate the inflationary side effects of the policy, the reduction in unemployment will not last, and the policy will only lead to higher inflation. If people overestimate the inflationary side effects of the policy, the policy may not reduce unemployment at all. Therefore, choice A is the best answer. Monetary policy may provide the macroeconomic stimulus, but it is not a prerequisite for the reduction in unemployment through expansionary policy.

According to the Modern View of the Phillips Curve, Expansionary