In the nineteenth century,some countries were on a gold standard so that on average the money supply growth rate was close to zero and expected inflation was more or less constant.For these countries during this time period,we find that increases in actual inflation were generally associated with falling unemployment.These findings
A)are consistent with Friedman and Phelps's theories,because they argued that when inflation was higher than expected,unemployment would fall.
B)are consistent with Friedman and Phelps's theories,because they argued that when prices rose unemployment would fall whether actual inflation was higher than expected or not.
C)are inconsistent with Friedman and Phelps's theories,because they argued that higher inflation would increase unemployment.
D)are inconsistent with Friedman and Phelps's theories,because they argued that inflation and unemployment are unrelated.

Question

Quizplus · Accepted Answer

Friedman and Phelps's theories, which became known as the natural rate of unemployment, stated that there was a trade-off between inflation and unemployment in the short run when unexpected inflation occurred. Specifically, when actual inflation is higher than expected, firms were tricked into thinking that demand for their products was higher than it was, so they produced more, which required hiring more workers to meet increased production. This led to a fall in unemployment. Therefore, Option A is the correct choice.

In the Nineteenth Century,some Countries Were on a Gold Standard