One event that undermined the belief that the Phillips curve represented a structural relationship was
A) the belief of Milton Friedman and Edmund Phelps that expected inflation remains constant.
B) the erratic behaviour of unemployment rates and inflation rates during the 1960s.
C) the extended period of time that both unemployment and inflation remained high during the Great Depression.
D) the increase in both the inflation rate and the unemployment rate in the 1970s.

Question

Quizplus · Accepted Answer

The increase in both the inflation rate and the unemployment rate in the 1970s undermined the belief in the Phillips curve because it contradicted the idea that there was a trade-off between unemployment and inflation. The Phillips curve predicted that as unemployment fell, inflation would rise, but in the 1970s both unemployment and inflation increased, which suggested that there was no stable relationship between the two variables. This led to the development of new economic theories, such as the natural rate hypothesis, which argued that inflation was determined by the expectations and behavior of individuals rather than by a structural relationship between unemployment and inflation.

One Event That Undermined the Belief That the Phillips Curve