The short-run Phillips Curve intersects the long-run Phillips Curve at the
A) nominal rate of interest.
B) current rate of inﬂation.
C) real interest rate.
D) natural rate of unemployment.

Question

Quizplus · Accepted Answer

The long-run Phillips Curve represents the vertical line at the natural rate of unemployment, which is determined by structural factors like labor market institutions, demographics, and technology. In the short run, there may be fluctuations in inflation and unemployment due to demand-side factors like monetary policy, fiscal policy, or shocks to aggregate demand or supply. The short-run Phillips Curve slopes downward, indicating that lower unemployment is associated with higher inflation, and vice versa. However, this relationship is only temporary, as workers and firms adjust their expectations and behavior in response to changes in prices and wages. Eventually, the economy will return to its natural rate of unemployment, and inflation will converge to the rate consistent with stable prices in the long run. Therefore, the short-run Phillips Curve intersects the long-run Phillips Curve at the natural rate of unemployment, which is the only sustainable level of employment in the economy. The other options are not relevant to the Phillips Curve theory.

The Short-Run Phillips Curve Intersects the Long-Run Phillips Curve at the