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Explain in details the following questions.

23 . Is the Phillips curve a myth? Intertemporal tradeoff between inflation and unemployment After the World War II, empirical economists noticed that, in many advanced economies, as unemployment fell, inflation tended to rise, and vice vers The inverse relationship between unemployment and inflation, was depicted as the Phillips curve, after William Phillips of the London School of Economics. In the 1950s and 1960s, the Phillips curve convinced many policy makers that they could use the relationship to pick acceptable levels of unemployment and inflation for the economy. They adjusted taxes, public expenditures, and interest rates to choose a desirable spot on the Phillips curve. However, theories based on the Phillips curve failed to explain stagflation of the 1970s, when many countries experienced high levels of both inflation and unemployment. Many economists began questioning the validity of the Phillips curve. Edmund Phelps of Columbia University suggested that the perceived tradeoff between unemployment and inflation was only temporary, and in the long run, the tradeoff disappears. Does this mean that the relationship revealed in the post-World War II data was invalid, and the Phillips curve itself is flawed? Read the following article, and then answer the subsequent questions. IS THE PHILLIPS CURVE A MYTHT BY THE APLIA CONTENT TEAM Phelps's research, which was conducted in the 1960s and 1970s and earned him a Nobel Prize in Economics in 2006, suggests that there will always be some frictional unemployment as workers move between jobs because of layoffs and quitting. In a world with no surprises, unemployment should return to a specific rate-the natural rate of unemployment-that is determined by turnover in the labor market. An unexpected increase in the rate of inflation might push the unemployment rate below this natural level, but the effect, he reasoned, should be temporary. For policy makers, Phelps's insights offered both good news and bad news. The bad news is that any fiscal or monetary program can keep unemployment below the natural rate only so long as it keeps generating a sequence of unexpected increases in the inflation rate. The good news is that since unemployment tends toward its natural rate, regardless of the inflation rate, policy makers can achieve permanently lower inflation without permanently higher unemployment. In a 2008 speech, economist Frederic Mishkin of Columbia University emphasized that the central bank has a dual goal of achieving price stability and maximum sustainable employment. The short-run Phillips curve is not a myth. It is not vertical, and it does imply that expansionary monetary policy that raises inflation can lower unemployment. The long-run Phillips curve, however, is vertical because the economy gravitates to a natural rate of unemployment and is independent of the inflation rate. Therefore, in the long run, any central bank's strategy to keep unemployment below the natural rate would only lead to higher inflation, which would lower economic activity in the long run. In practice, in the short run, a negative shock to aggregate demand that caused by households cutting spending leads to a decline in actual output relative to its potential.' Future inflation will fall below levels consisted with price stability, and the central bank should pursue an expansionary policy to keep inflation from falling. An expansionary policy will then result in an increase in demand that boosts output back towards its potential, and will return inflation to a level consistent with price stability, Stabilizing output thus stabilizes inflation and vice versa. Conversely, a negative supply shock, for example, an increase in the price of energy, drives inflation and output in opposite directions. In this case, because a contractionary monetary policy put in place to reduce inflation can lead to lower output, the goal of stabilizing inflation might conflict with the goal of stabilizing economic activity.According to Phelps, if unemployment falls below the equilibrium level, inflation tends to and then consumer expectations of inflation . Which of the following describes the outcome?. No lower unemployment, but higher inflation O Lower unemployment and no higher inflation Lower unemployment and lower inflation O Lower unemployment and higher inflation According to the article, a negative shock to aggregate demand causes in future inflation and In actual output relative to its potential. which of the following would be an appropriate policy response in order to stabilice prices? O An expansionary monetary policy to keep inflation from falling Q An expansionary fiscal policy to keep inflation from rising A contractionary fiscal policy to keep inflation from falling C A contractionary fiscal policy to keep inflation from rising Grade It Now Save & Continue Continue without savingUltimately, the relationship broke down in the early 19705. Phelps was critical about the statistical nature of the Phillips curve, which was not grounded in economic theories of decisions made by people or companies, nor was it related to any notion of stability in the labor market. He stressed that inflation depends not only on the levels of unemployment, but also on how quickly companies and households expect prices and wages to rise. For any level of unemployment, if people and companies expect inflation to rise, they will demand higher wages and set higher prices, so the expectations will become a self-fulfilling prophecy. Phelps's model became known as the "expectations-augmented Phillips curve" and the work has had profound consequences for economic policy: expectations of price increases tend to go up when unemployment is below an "equilibrium rate,"which can differ between countries, depending on institutions and the strength of the labor market. If unemployment falls below this equilibrium level, inflation tends to rise (as in the standard Phillips curve model), but then expectations of price increases, results in no lower unemployment, but only higher inflation. The disastrous rise in inflation in the early 1970s was partly a result of policy makers not understanding that the equilibrium unemployment rate had risen as the oil crisis hit and productivity growth fell, so they kept loosening monetary and fiscal policy to lower unemployment below this level. The consequence was ever-higher inflation. Eventually, monetary policy makers accepted the role of expectations, First, expectations of future policy actions and accompanying economic conditions play a crucial role in determining the effects of current policy actions on the economy. Second, monetary policy is most effective when the central bank is firmly committed, through its actions and statements, to a "nominal anchor" - such as to keeping inflation low and stable. A strong commitment to stabilizing inflation helps anchor inflation expectations so that a central bank will not have to worry that expansionary policy to counter a negative demand shock will lead to a sharp rise in expected inflation-a so-called inflation scare. The level of output that the economy can produce at the maximum sustainable level of employment. Sources: Chris Giles, "Phelps Wins Nobel for Exploding Economic Myths." Financial Times of London, Now ber 10, 2005; Frederic S. Mixtion, "Does Stabilizing Inflation Contribute to Scablli mic Activity?" Board of Governors of the Federal Reserve, February 25, 2008, https://www.federalreserve.gowewsevents/speech/mishkin20080225s.htm. According to Phelps, if unemployment falls below the equilibrium level, inflation tends to , and then consumer expectations of inflation .Which of the following describes the outcome? No lower unemployment, but higher inflation O Lower unemployment and no higher inflation Lower unemployment and lower inflation Lower unemployment and higher inflation According to the article, a negative shock to aggregate demand causes in future inflation and in actual output Type here to search O