Chapter 27: Problem 2

A difficulty in using the Phillips curve as a policy menu is a. that the natural rate of unemployment does not exist. b. that the curve does not remain in one position. c. deciding between monetary and fiscal policies. d. that Democrats choose one point on the curve and Republicans choose another point.

Short Answer

Expert verified

The difficulty in using the Phillips curve as a policy menu lies in the fact that the curve does not remain in one position (option b). The relationship between inflation and unemployment can change over time due to various factors, making it challenging for policymakers to rely on a fixed policy menu.

Step by step solution

1. Understanding the Phillips curve

The Phillips curve shows the relationship between inflation and unemployment rate in an economy. Specifically, the curve illustrates that there is a trade-off between unemployment and inflation, which policymakers must consider when making economic decisions.

2. Evaluating Option a

Option a states that the difficulty stems from the non-existence of the natural rate of unemployment. However, this is not a valid argument, since the natural rate of unemployment does exist. Moreover, it refers to the unemployment rate that is achieved when the economy is at its potential or long-run level. Therefore, option a is not the correct answer.

3. Evaluating Option b

Option b suggests that the difficulty lies in the fact that the Phillips curve does not remain in one position. This is a valid concern since the relationship between inflation and unemployment can differ due to various factors, such as changes in the economy, expectations of future inflation, and possible shifts in the natural rate of unemployment. As a result, the Phillips curve can shift over time, making it difficult for policymakers to rely on it as a fixed policy menu. Therefore, option b seems to be the correct answer.

4. Evaluating Option c

Option c states that the difficulty comes from deciding between monetary and fiscal policies. While it is true that policymakers must consider the implications of different policy tools, this issue is not specific to the Phillips curve. Instead, it is a general concern that policymakers must face when designing economic policies. So, option c is not the correct answer.

5. Evaluating Option d

Option d proposes that the difficulty arises because Democrats and Republicans choose different points on the curve. However, this issue is more related to the political preferences and beliefs of the policy-makers and not an inherent difficulty in using the Phillips curve. Therefore, option d is not the correct answer.

6. Conclusion

After evaluating the four options, we can determine that option b (the curve does not remain in one position) best describes the difficulty in using the Phillips curve as a policy menu. It reveals that the shifting nature of the Phillips curve makes it a less reliable tool for policymakers to base their decisions on.