Which of the following equations summarize the analysis of Friedman and Phelps (where a is a positive number)?
A)unemployment rate = natural rate of unemployment - a(actual inflation - expected inflation)
B)unemployment rate = natural rate of unemployment - a(expected inflation - actual inflation)
C)unemployment rate = expected rate of inflation - a(actual inflation - expected inflation)
D)unemployment rate = actual rate of inflation - a(actual unemployment - expected unemployment)

Question

Quizplus · Accepted Answer

The equation given in option A is known as the Phillips curve, which asserts an inverse relationship between unemployment and inflation. It implies that a decrease in unemployment rate below the natural rate of unemployment would lead to an increase in inflation, whereas an increase in unemployment would cause a reduction in inflation. The 'a' parameter represents the sensitivity of inflation to deviations from expected inflation, which can vary depending on several factors, including the type of shocks experienced by the economy. Therefore, option A is the correct answer to the question.

Which of the Following Equations Summarize the Analysis of Friedman