Which of the following is correct according to the long-run Phillips curve? A. N

Question

Which of the following is correct according to the long-run Phillips curve? A. No government policy, including changes in the money supply growth rate, can change the natural rate of unemployment. B. Changes in the money supply growth rate are the only means by which government policy can change the natural rate of unemployment. C. Monetary policy and other government policies can shift the long-run Phillips curve. D. Monetary policy cannot change the natural rate of unemployment, but other government policies can.

Explanation / Answer

According the Milton Friedman, people are rational and predict the economic variables's future. Hence, any action by the government to reduce the natural rate of unemployment would be of no use. Since people will behave according to the predictions. Thus, the long run Philips curve become vertical, where natural rate of unemployment came to original position.

Hence correct answer is (A) No government policy, including changes in the money supply growth rate, can change the natural rate of unemployment

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