In Milton Friedman and Edmund Phelps' expectations-augmented Phillips curve,________.
A)unemployment will,in the long run,reach the natural rate
B)in the long run,expected inflation will reach the NAIRU
C)inflation is positively related to the unemployment gap
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

According to the expectations-augmented Phillips curve, in the long run, unemployment will reach its natural rate of equilibrium, unaffected by the rate of inflation. The theory suggests that any inflationary pressures caused by high levels of employment will only result in sustained inflation if workers come to anticipate future price increases and demand higher wages, leading to higher costs for firms and sustained inflation. However, in the long run, the expectations of workers and firms adjust to the new reality, leading to a new equilibrium level of inflation, but with no impact on unemployment. It does not suggest that expected inflation will necessarily reach the NAIRU or that inflation is positively related to the unemployment gap.

In Milton Friedman and Edmund Phelps' Expectations-Augmented Phillips Curve,________