Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment,but there should be a stable relationship between
A)anticipated inflation and frictional unemployment.
B)anticipated inflation and cyclical unemployment.
C)unanticipated inflation and frictional unemployment.
D)unanticipated inflation and cyclical unemployment.

Question

Quizplus · Accepted Answer

Friedman and Phelps suggested that there should be a stable relationship between unanticipated inflation and cyclical unemployment. This is because in the short run, unanticipated inflation can lead to a decrease in unemployment as wages and prices adjust asymmetrically, leading to an increase in output and employment. However, in the long run, the effects of unanticipated inflation wear off and the economy returns to its natural rate of unemployment, which is determined by structural factors such as demographics, technology, and institutions. Therefore, there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between unanticipated inflation and cyclical unemployment.

Friedman and Phelps Suggested That There Should Not Be a Stable