What did Friedman and Phelps argue about the effectiveness of monetary policies?
A) As long as people's inflation expectations were fixed, an increase in the money supply growth rate could not change output in the short or long run.
B) If people's inflation expectations were fixed, in the short run, a decrease in the money supply growth rate could raise output and unemployment.
C) When the money supply growth rate changed, people would eventually revise their inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.
D) When the money supply growth rate changes, people slowly adjust their inflation expectations; therefore, the unemployment rate changes only in the long run but not in the short run.

Question

Quizplus · Accepted Answer

Friedman and Phelps argued that as long as people's inflation expectations were fixed, an increase or decrease in the money supply growth rate could affect employment and output only in the short run, but eventually, people would adjust their inflation expectations to match the new money supply growth rate, making any change in unemployment and output temporary. Therefore, option C is the correct response.

What Did Friedman and Phelps Argue About the Effectiveness of Monetary