The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds
A)even when expected inflation changes.
B)even when the natural rate of unemployment changes.
C)even if both the expected inflation rate and the natural rate of unemployment change.
D)as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

Question

Quizplus · Accepted Answer

The Friedman-Phelps analysis, which introduced the concept of the natural rate of unemployment and expectations-augmented Phillips Curve, suggests that the negative relationship between inflation and unemployment only holds in the short run and under the condition that expected inflation and the natural rate of unemployment are stable. When expectations adjust or the natural rate changes, the relationship does not hold as initially predicted.

The Friedman-Phelps Analysis Shows That a Negative Relationship Between Inflation