Observations of inflation in the 1970s prompted what further addition to the Phillips curve? expected inflation price shocks personal consumption expenditures all of the above none of the above
Observations of inflation in the 1970s prompted what further addition to the Phillips curve? expected inflation price shocks personal consumption expenditures all of the above none of the above
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:**Question:**
Observations of inflation in the 1970s prompted what further addition to the Phillips curve?
- ○ expected inflation
- ● price shocks
- ○ personal consumption expenditures
- ○ all of the above
- ○ none of the above
**Explanation:**
The correct answer is "price shocks."
During the 1970s, the traditional understanding of the Phillips curve, which describes an inverse relationship between unemployment and inflation, was challenged. The occurrence of stagflation—simultaneously high inflation and unemployment—led economists to consider additional factors such as price shocks. These are sudden, unexpected changes in prices, particularly associated with oil crises during that period, that influenced inflation independently of the unemployment rate. As a result, the concept of the Phillips curve was expanded to account for these external shocks, altering its application in economic policy and analysis.
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