Monetary Policy in Flosserland: In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years.

Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.

a) both the Classical dichotomy and the long-run Phillips curve

b) the Classical dichotomy, but not the long run Phillips curve

c) the long-run Phillips curve, but not the Classical dichotomy

d) neither the long-run Phillips curve nor the Classical dichotomy

The correct answer is d) neither the long-run Phillips curve nor the Classical dichotomy.

Explanation:

The answer that best suits the situation described is the Phillips curve in the short term but not in the long term.

The Phillips curve starts from the principle that the amount of money circulating (commonly called "money supply") has real effects on the economy in the short term. In this way, an increase in the money supply would have a beneficial effect on aggregate demand, as citizens will spend more when their nominal wages are increased (known as "monetary illusion") and a more favorable framework for investment and investment will be created. that the prospects of rising prices will improve the expectations of corporate profits. The improvement in aggregate demand would result in greater economic growth, and this in turn in the creation of new jobs. This is how an inverse relationship between inflation and unemployment is established, expressed graphically by a downward curve.