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In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
The second paragraph serves primarily to:
A. present evidence that revealed limitations in an earlier economic theory
B. contrast the short-run trade-off advocated by early Phillips-Curve supporters with later arguments that supply shocks nullify that trade-off in the long run
C. trace the intellectual origins of the Phillips Curve and its initial policy use
D. argue that policy failures of the 1960s arose chiefly from ignoring supply shocks while still accepting the inflation–unemployment trade-off
E. describe how inflation expectations can reinforce, rather than weaken, the tradeoff proposed by Phillips
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
The second paragraph serves primarily to:
A. present evidence that revealed limitations in an earlier economic theory
B. contrast the short-run trade-off advocated by early Phillips-Curve supporters with later arguments that supply shocks nullify that trade-off in the long run
C. trace the intellectual origins of the Phillips Curve and its initial policy use
D. argue that policy failures of the 1960s arose chiefly from ignoring supply shocks while still accepting the inflation–unemployment trade-off
E. describe how inflation expectations can reinforce, rather than weaken, the tradeoff proposed by Phillips
10 Oct 2025, 22:38
Kudos
Bookmarks
Official Solution:
In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
The second paragraph serves primarily to:
A. present evidence that revealed limitations in an earlier economic theory
B. contrast the short-run trade-off advocated by early Phillips-Curve supporters with later arguments that supply shocks nullify that trade-off in the long run
C. trace the intellectual origins of the Phillips Curve and its initial policy use
D. argue that policy failures of the 1960s arose chiefly from ignoring supply shocks while still accepting the inflation–unemployment trade-off
E. describe how inflation expectations can reinforce, rather than weaken, the tradeoff proposed by Phillips
A) Correct Answer. The second paragraph describes stagflation and the 1970s oil shocks, events that did not fit the original Phillips-Curve rule of a stable inflation–unemployment trade-off. It then cites Friedman and Phelps, who showed that inflation expectations undermine any lasting employment gain. By presenting these anomalies and the expectation-based critique, the paragraph’s main purpose is to reveal limits in the earlier theory.
B) Incorrect. This option says the paragraph contrasts the short-run trade-off with later evidence that supply shocks nullify it, overlooking the central role of inflation expectations. While the paragraph does mention oil shocks, it uses them only to illustrate how the breakdown persisted after expectations had already erased the long-run trade-off. Because the option misidentifies the key mechanism, it misses the paragraph’s primary focus.
C) Incorrect. Intellectual origins and early policy applications appear in the first paragraph, not the second. The second paragraph concentrates on why the early model broke down.
D) Incorrect. Oil shocks are cited, yet the paragraph does not claim that policy failures were chiefly due to ignoring supply disturbances. Instead, it argues that overlooking inflation expectations was the main error.
E) Incorrect. The paragraph states that inflation expectations eliminate the long-run trade-off, not reinforce it. This option reverses the point and therefore cannot be correct.
Answer: A
In the mid-twentieth century, economist A.W. Phillips identified a persistent inverse relationship between unemployment and inflation, suggesting that efforts to reduce joblessness tended to accelerate price increases. This empirical observation, later formalized as the Phillips Curve, appeared to provide policymakers with a manageable tradeoff: lower unemployment could be achieved at the expense of higher inflation, and vice versa. During the 1960s, this framework gained wide acceptance, informing expansionary fiscal and monetary strategies across several advanced economies.
The phenomenon of stagflation in the 1970s- when high inflation coexisted with high unemployment- posed a direct challenge to this view. Economists such as Milton Friedman and Edmund Phelps argued that the original formulation neglected the role of expectations. If households and firms come to anticipate inflation, they adjust wages and prices accordingly, negating any sustained employment gains from expansionary policy. The oil shocks of that decade, which sharply increased production costs across industries, further illustrated how supply-side disturbances could simultaneously drive inflation and unemployment, undermining the presumed stability of the curve. Consequently, the tradeoff between inflation and unemployment was understood to exist only in the short run.
Subsequent research has sought to reconcile these insights by incorporating expectations, productivity trends, and supply shocks into a more dynamic model. The modern interpretation treats the Phillips Curve not as a stable empirical law but as a conditional relationship whose slope and position shift over time. Thus, while the curve remains conceptually significant, its predictive and policy relevance have diminished as economists recognize the economy’s adaptive complexity.
The second paragraph serves primarily to:
A. present evidence that revealed limitations in an earlier economic theory
B. contrast the short-run trade-off advocated by early Phillips-Curve supporters with later arguments that supply shocks nullify that trade-off in the long run
C. trace the intellectual origins of the Phillips Curve and its initial policy use
D. argue that policy failures of the 1960s arose chiefly from ignoring supply shocks while still accepting the inflation–unemployment trade-off
E. describe how inflation expectations can reinforce, rather than weaken, the tradeoff proposed by Phillips
A) Correct Answer. The second paragraph describes stagflation and the 1970s oil shocks, events that did not fit the original Phillips-Curve rule of a stable inflation–unemployment trade-off. It then cites Friedman and Phelps, who showed that inflation expectations undermine any lasting employment gain. By presenting these anomalies and the expectation-based critique, the paragraph’s main purpose is to reveal limits in the earlier theory.
B) Incorrect. This option says the paragraph contrasts the short-run trade-off with later evidence that supply shocks nullify it, overlooking the central role of inflation expectations. While the paragraph does mention oil shocks, it uses them only to illustrate how the breakdown persisted after expectations had already erased the long-run trade-off. Because the option misidentifies the key mechanism, it misses the paragraph’s primary focus.
C) Incorrect. Intellectual origins and early policy applications appear in the first paragraph, not the second. The second paragraph concentrates on why the early model broke down.
D) Incorrect. Oil shocks are cited, yet the paragraph does not claim that policy failures were chiefly due to ignoring supply disturbances. Instead, it argues that overlooking inflation expectations was the main error.
E) Incorrect. The paragraph states that inflation expectations eliminate the long-run trade-off, not reinforce it. This option reverses the point and therefore cannot be correct.
Answer: A
