Learning Path
Question & Answer1
Understand Question2
Review Options3
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Explore TopicChoose the Best Answer
A
It showed a clear trade-off between inflation and unemployment at all times.
B
It indicated that inflation and unemployment could rise simultaneously during supply shocks.
C
It proved that monetary policy was always effective in controlling inflation.
D
It demonstrated that fiscal policy had no effect on unemployment rates.
Understanding the Answer
Let's break down why this is correct
Answer
The Phillips Curve shows the relationship between inflation and unemployment, suggesting that when inflation rises, unemployment tends to fall, and vice versa. However, during periods of cost-push inflation, like the oil crises in the 1970s, this relationship became more complicated. Cost-push inflation happens when production costs increase, leading to higher prices and often higher unemployment at the same time, which contradicts the Phillips Curve's original idea. For example, when oil prices soared, many businesses faced higher costs, leading them to reduce hiring or even lay off workers, creating higher unemployment despite rising prices. This historical context made economists rethink the Phillips Curve and understand that it does not always hold true in every situation, especially when external factors like resource shortages impact the economy.
Detailed Explanation
During cost-push inflation, both prices and unemployment can rise together. Other options are incorrect because Some people think there's always a clear choice between inflation and unemployment; It's a common belief that monetary policy, which involves controlling money supply, always works.
Key Concepts
Phillips Curve
historical context
cost-push inflation
Topic
Phillips Curve Insights
Difficulty
hard level question
Cognitive Level
understand
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