A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is:

A. consistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would not increase inflation.

B. consistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would increase inflation.

C. inconsistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would not increase inflation.

D. inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

Question

Celia Morales

Business

10 July, 19:15

A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is:

A. consistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would not increase inflation.

B. consistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would increase inflation.

C. inconsistent with the long-run Phillips curve. However, the long-run Phillips curve implies that such a policy would not increase inflation.

D. inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

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Answers (1)

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Giuliana Copeland · Answer 1

D) inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

Explanation:

The short run Phillips curve states that there is a trade off between inflation and unemployment. In the short run, higher inflation rate results in lower unemployment. But in the long run this trade off doesn't take place.

The long run Phillips curve is vertical and shows that there is no trade off between inflation and unemployment. That means that increasing the money supply and therefore increasing the inflation rate, will only decrease unemployment in the short run, but it will have no positive effect in the long run.