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    Question

    The Phillips Curve represents the relationship between

    _____ ( i ) and _____ (ii) in the short run. However, in the long run , the Phillips Curve becomes _____ (iii) , suggesting that monetary policy cannot permanently reduce _____ (iv) by increasing inflation.  
    A (i) Inflation, (ii) Unemployment, (iii) Vertical, (iv) Unemployment Correct Answer Incorrect Answer
    B (i) GDP Growth, (ii) Inflation, (iii) Upward Sloping, (iv) GDP Growth Correct Answer Incorrect Answer
    C (i) Inflation, (ii) Tax Rates, (iii) Horizontal, (iv) Real Wages Correct Answer Incorrect Answer
    D (i) Money Supply, (ii) Inflation, (iii) Downward Sloping, (iv) Aggregate Demand Correct Answer Incorrect Answer
    E (i) Money Supply, (ii) Inflation, (iii) Downward Sloping, (iv) Aggregate Demand Correct Answer Incorrect Answer

    Solution

    Explanation:  

    • Phillips Curve originally shows an inverse relationship between inflation ( i ) and unemployment (ii) in the short run.  
    • In the long run , expectations adjust, making the Phillips Curve vertical (iii) at the natural rate of unemployment.  
    • Monetary policy cannot permanently reduce unemployment (iv) through inflation, as workers adjust their expectations.  

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