LONG RUN PHILLIPS CURVE
Q. 2018 JULY II
The relationship described by the Expectations-Augmented Phillips curve is correct in which of the following?
A) Only in the long run.
B) Only in the short run.
C) Both in the short run and in the long run.
D) Neither in the short run nor in the long run.
ANS: (A) Milton Friedman and Edmund Phelps introduced the concept of Expected Augmented Phillips curve which states that in the long run, there was no trade-off between unemployment and inflation. The long-run Phillips curve is a vertical line at the natural rate of unemployment, so inflation and unemployment are unrelated in the long run. The expectations-augmented Phillips curve introduces adaptive expectations into the Phillips curve. It is a theory that states individuals adjust their expectations of the future based on recent past experiences and events.