The long-run Phillips Curve is
A)horizontal at the level of expected inflation p(e).
B)vertical at the natural level of Y/Y(n)= 100.
C)dependent on price expectations.
D)dependent on the rate of inflation.

Question

Quizplus · Accepted Answer

In the long run, the Phillips Curve is vertical at the natural level of output where unemployment is at its natural rate and there is no trade-off between inflation and unemployment. This is because in the long run, any attempt to reduce unemployment through expansionary policies would only lead to temporary benefits as prices and wages adjust to the higher demand, leaving us back at the natural level of output with the same level of unemployment and a higher inflation rate. Therefore, the long-run Phillips Curve depends only on the natural rate of unemployment and is independent of price expectations or the rate of inflation.

The Long-Run Phillips Curve Is