There is no long-run tradeoff between inflation and unemployment because
A)the aggregate demand curve always shifts back to its baseline position.
B)inflation always returns to the baseline level.
C)unemployment always returns to the natural rate.
D)the Federal Reserve does not allow such a tradeoff.
E)potential GDP declines as the rate of inflation increases.

Question

Quizplus · Accepted Answer

According to the Phillips curve, there may be a short-term tradeoff between inflation and unemployment, meaning that lowering inflation in the short run may result in higher unemployment and vice versa. However, in the long run, the Phillips curve is vertical, and there is no tradeoff. This is because in the long run, prices and wages adjust to the level of inflation and there is no effect on unemployment. Therefore, unemployment always returns to the natural rate regardless of the level of inflation.

There Is No Long-Run Tradeoff Between Inflation and Unemployment Because