Answer to Question #246467 in Macroeconomics for Ch 30 - 2

Question

The trade-off between inflation and unemployment:

(i) Is depicted by the long-run Phillips curve.

(ii) Is consistent with the theory of money neutrality.

(iii) Shows the possible effects of monetary policy in the short-run.

i and ii are correct.

ii and iii are correct.

i and iii are correct

Only iii is correct.

Answer 1

Correct option is (D) Only iii is correct.

In the short run, there is a trade off between inflation rate and unemployment. As inflation increases (decreases), unemployment rate decreases (increases), implicating a downward sloping Phillips curve. But in the long run, money is neutral and so the Phillips curve is vertical, signifying no such trade off exists.