At the end of 2014, the unemployment rate in the U.S. was 5%. The Federal Reserv

Question

At the end of 2014, the unemployment rate in the U.S. was 5%. The Federal Reserve has stated that it will conduct monetary policy to bring down this unemployment rate during 2015. Suppose that the natural rate of unemployment is 6%, the value of a is one, and the public expects inflation of 4%. According to the given information, which of the answer choices correctly gives values of actual inflation that would support Phillips’ theory and Friedman’s theory, respectively?

A. Phillips: 6%; Friedman: 5%

B. Phillips: 7%; Friedman: 6%

C. Phillips: 5%; Friedman: 2%

D. Phillips: 3%; Friedman: 4%

Explanation / Answer

C. Phillips: 5%; Friedman: 2%

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