Policymakers' attempts to use the Phillips curve to reduce the unemployment rate below the natural rate
A) will be successful since the Phillips curve shows the relationship between the inflation rate and the unemployment rate.
B) will be successful if monetary policy is used.
C) will be unsuccessful if monetary policy is used since monetary policy leads to higher prices.
D) will be unsuccessful since workers' expectations adjust to attempts to reduce unemployment below the natural rate.

Question

Quizplus · Accepted Answer

The Phillips curve shows an inverse relationship between unemployment and inflation, but this relationship only holds in the short run. In the long run, the Phillips curve becomes vertical at the natural rate of unemployment, where the economy experiences the normal rate of inflation. If policymakers attempt to reduce unemployment below the natural rate, it will lead to an increase in the rate of inflation, which workers will eventually come to expect. As a result, the Phillips curve will shift upwards, making it difficult for policymakers to reduce unemployment without leading to even higher levels of inflation. This phenomenon is known as the "adaptive expectations hypothesis" and suggests that policymakers cannot permanently reduce unemployment below its natural rate. Monetary policy alone may be insufficient to reduce unemployment below the natural rate because it cannot overcome the expectations of workers.

Policymakers' Attempts to Use the Phillips Curve to Reduce the Unemployment