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    Question

    Consider the following statements about the Phillips

    Curve: 1. The Phillips Curve shows an inverse relationship between inflation and unemployment. 2. In the long run, the Phillips Curve becomes a vertical line. 3. It is a universally accepted theory without exceptions. Which of the above statements are correct?
    A 1 and 2 only Correct Answer Incorrect Answer
    B 2 and 3 only Correct Answer Incorrect Answer
    C 1 and 3 only Correct Answer Incorrect Answer
    D 1, 2, and 3 Correct Answer Incorrect Answer

    Solution

    The Phillips Curve illustrates an inverse relationship between inflation and unemployment (statement 1). In the long run, it becomes vertical as inflation expectations adjust (statement 2). It has exceptions, such as stagflation, where both inflation and unemployment rise (statement 3 is incorrect).

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