When the Phillips curve was viewed as a structural relationship,it was believed that the central bank could
A) permanently reduce the unemployment rate if it were willing to accept an increase in the inflation rate.
B) permanently reduce the inflation rate as it permanently reduced the unemployment rate.
C) permanently reduce the unemployment rate if it were willing to increase the real interest rate.
D) permanently reduce the inflation rate if it were willing to decrease the real interest rate.

Question

Quizplus · Accepted Answer

When the Phillips curve was viewed as a structural relationship, it was argued that the central bank could permanently reduce the unemployment rate if it were willing to accept an increase in the inflation rate. This was based on the assumption that there was a trade-off between inflation and unemployment, and that the curve was relatively stable over time. Policymakers could therefore choose a point on the Phillips curve that represented their preferred combination of inflation and unemployment, and use monetary policy to maintain that level of economic activity. However, the stability of the Phillips curve has been called into question in recent years, with some economists arguing that it has become flatter or even disappeared altogether.

When the Phillips Curve Was Viewed as a Structural Relationship,it