Macroeconomics

Free Version

Upgrade subject to access all content

Difficult

Phillips Short to Long Money Illusion

MACRO-WG1HQS

Assume the economy is originally at the natural rate of unemployment of 5% and the current inflation rate is 3%. Also, assume that wage earners do not anticipate or understand the inflation effect of any policy changes.

According to the Phillips curve, if the policymaker attempts to stimulate the economy with either expansionary fiscal or monetary policy, in the short run inflation will

and unemployment will

. In the long run, inflation will

and unemployment will

.