In the late 1960s, what did Milton Friedman and Edmund Phelps predict about the relationship between inflation and unemployment?

• A. That there is no long-run trade-off between inflation and unemployment.
• B. That the Phillips Curve is a permanent and stable relationship.
• C. That higher inflation always leads to lower unemployment in both the short and long run.
• D. That inflation and unemployment are unrelated in any time frame.

Answer: (A)

Verified step by step guidance

1. Understand the historical context: Before Friedman and Phelps, the Phillips Curve suggested a stable, inverse relationship between inflation and unemployment, implying policymakers could choose a trade-off between the two.
2. Recognize Friedman and Phelps' key insight: They introduced the concept of the 'natural rate of unemployment' and argued that any trade-off between inflation and unemployment is only temporary.
3. Analyze the long-run perspective: According to their theory, in the long run, the economy returns to the natural rate of unemployment regardless of the inflation rate, meaning no permanent trade-off exists.
4. Understand the role of expectations: They emphasized that when people anticipate inflation, they adjust their behavior, which eliminates the short-run trade-off and leads to a vertical long-run Phillips Curve.
5. Summarize their prediction: The long-run Phillips Curve is vertical, indicating that inflation does not affect unemployment in the long run, so there is no long-run trade-off between inflation and unemployment.