Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because
A) economic participants routinely incorporate changes in the inflation rate into their expectations.
B) economic participants are not rational, and therefore act unpredictably to any policy change.
C) unemployment levels and the inflation rate have a clear, positive relationship.
D) unemployment levels and the inflation rate have a negative (inverse) relationship.

Question

Quizplus · Accepted Answer

Friedman and Phelps argued that any attempt by policy makers to manipulate the economy to reduce unemployment below its natural rate would ultimately result in higher inflation. This was because economic participants were rational and would adjust their expectations to incorporate changes in the inflation rate. As a result, there would be no long-run trade-off between inflation and unemployment.