You are a staff economist with the Federal Reserve. The chairman says to you, "The rate of change in inflation is too high, and I don't think the Phillips curve is very steep. What should we do to reduce these inflationary increases?" How do you respond?
A) "Because the Phillips curve is relatively flat, we need to increase interest rates a lot, as the change in inflation is not very responsive to changes in output."
B) "Because the Phillips curve is relatively flat, we need to decrease interest rates a lot, as the change in inflation is not very responsive to changes in output."
C) "Because the Phillips curve is relatively flat, we need to increase interest rates only a little, as the change in inflation is very responsive to changes in output."
D) "Because the Phillips curve is relatively flat, we need to increase interest rates only a little, as the change in inflation is not very responsive to changes in output."
E) "Because the Phillips curve is relatively flat, we can do nothing to interest rates, as the change in inflation does not respond to changes in output."

Question

Quizplus · Accepted Answer

A flat Phillips curve implies that inflation is not very responsive to changes in output, meaning that to reduce inflation, the Federal Reserve would need to significantly increase interest rates to have an effect.

You Are a Staff Economist with the Federal Reserve