According to the Phillips curve analysis, if policy makers reduce aggregate demand growth, they can lower inflation, but only at the cost of a:
A)permanent increase in the natural rate of unemployment.
B)permanent increase in the actual unemployment rate.
C)temporary increase in unemployment.
D)temporary decrease in the natural level of unemployment.

Question

According to the Phillips curve analysis, if policy makers reduce aggregate demand growth, they can lower inflation, but only at the cost of a:
A)​permanent increase in the natural rate of unemployment.
B)​permanent increase in the actual unemployment rate.
C)​temporary increase in unemployment.
D)​temporary decrease in the natural level of unemployment.

Quizplus · Accepted Answer

Phillips curve analysis suggests that there is a trade-off between inflation and unemployment in the short-run. If policy makers reduce aggregate demand growth, they can lower inflation, but this will lead to a temporary increase in unemployment. The reason behind it is that lower demand for goods and services will decrease the demand for labor, causing firms to reduce their workforce or cut back on hiring. However, this increase in unemployment is only temporary because eventually, as wages and prices adjust, the economy moves back to its natural rate of unemployment. Therefore, the best choice is C, a temporary increase in unemployment.

According to the Phillips Curve Analysis, If Policy Makers Reduce