Question

Q. Consider the following statements in reference to Phillips Curve:

Which of the statements given above is/are correct?

• A. 1 only
• B. 2 only
• C. Both 1 and 2
• D. Neither 1 nor 2

Answer 1

The correct option is D Neither 1 nor 2

Explanation:

• Statement 1 is incorrect. The central bank reduces interest rate which increases inflation in order to lessen the unemployment rate, it may cause an initial shift along the short-run Phillips curve, but as a worker and consumer expectations about inflation adapt to the new environment, in the long run, the Phillips curve itself can shift outward.
• Statement 2 is incorrect. Stagflation occurs when an economy experiences stagnant economic growth, high unemployment and high price inflation. This scenario, of course, directly contradicts the theory of the Phillips curve.