Answer to Question #246923 in Macroeconomics for Mana

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.

A. Only ii is correct.

B. Only iii is correct.

C. i and iii are correct

D. ii and iii are correct.

Answer 1

Correct option is (D).

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.