The modern view of the Phillips curve suggests that
A) when inflation is less than anticipated, unemployment will rise above the natural rate.
B) monetary policy will be unable to affect inflation.
C) when people accurately anticipate inflation, expansionary monetary policy will reduce unemployment.
D) when inflation exceeds what was anticipated, the natural rate of unemployment will rise.

Question

Quizplus · Accepted Answer

The modern view of the Phillips curve suggests that there is a trade-off between inflation and unemployment in the short-run, but in the long-run, the Phillips curve is vertical at the natural rate of unemployment. When inflation is less than anticipated, unemployment will rise above the natural rate as firms adjust their expectations and reduce output and hiring. This is known as the "misperception theory" of the Phillips curve. Therefore, choice A is the best answer.

The Modern View of the Phillips Curve Suggests That