In the nineteenth century, some countries were on gold standards 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 inflation were generally associated with falling unemployment. Are these findings consistent with Friedman and Phelps's theories, and why?
A) Yes, because they argued that when inflation was higher than expected, unemployment would fall.
B) Yes, because they argued that when prices rose unemployment would fall, whether actual inflation was higher than expected or not.
C) No, because they argued that inflation and unemployment are negatively correlated.
D) No, because they argued that inflation and unemployment were unrelated.

Question

Quizplus · Accepted Answer

Friedman and Phelps both believed in the theory of the Phillips curve, which suggested a trade-off between inflation and unemployment in the short run. They argued that when inflation was higher than expected, firms would increase output, leading to a temporary reduction in unemployment. Therefore, the findings that inflation was associated with falling unemployment during the time period of gold standard countries are consistent with Friedman and Phelps's theories.

In the Nineteenth Century, Some Countries Were on Gold Standards