The Friedman-Phelps (natural rate) hypothesis made the strong prediction that:
A) once inflation gets embedded in people's expectations, unemployment and inflation will have a trade-off.
B) the unemployment and inflation trade-off will not survive if inflation gets embedded in people's expectations.
C) there will always be an unemployment and inflation trade-off.
D) the unemployment and inflation trade-off is a myth.

Question

Quizplus · Accepted Answer

The Friedman-Phelps hypothesis states that there is a natural rate of unemployment, and that once inflation gets embedded in people's expectations, the unemployment and inflation trade-off will not survive. This is because workers and firms will adjust their behavior and expectations in response to inflation, leading to higher wages and prices and ultimately higher inflation without any reduction in unemployment. Therefore, choice B is the best answer.

The Friedman-Phelps (Natural Rate) Hypothesis Made the Strong Prediction That