If an increase in inflation permanently reduced unemployment, then
A)money would not be neutral and the long-run Phillips curve would slope upward.
B)money would not be neutral and the long-run Phillips curve would slope downward.
C)money would be neutral and the long-run Phillips curve would slope upward.
D)money would be neutral and the long-run Phillips curve would slope downward.

Question

Quizplus · Accepted Answer

The correct answer is B because if an increase in inflation permanently reduced unemployment, it implies that monetary policy (changes in the money supply) has real effects on the economy in the long run, indicating that money is not neutral. The long-run Phillips curve, which typically shows the relationship between inflation and unemployment, would slope downward in this scenario, reflecting the inverse relationship between inflation and unemployment.

If an Increase in Inflation Permanently Reduced Unemployment, Then