The long-run Phillips curve applies when the economy is at full employment, so the long-run Phillips curve is ________ which demonstrates that changes in the inflation rate ________ effect on unemployment.
A) vertical; have no
B) vertical; have an
C) a downward sloping straight line with a 45 degree slope; have an
D) an upward sloping straight line with a 45 degree slope; have an
E) horizontal; have no

Question

Quizplus · Accepted Answer

The long-run Phillips curve is vertical, indicating that changes in inflation have no effect on unemployment when the economy is at full employment. This is due to the fact that any short-term decrease in unemployment that is achieved by increasing inflation is only temporary, as people adjust their expectations of inflation and the natural rate of unemployment returns to its equilibrium level. Therefore, in the long run, only changes in the natural rate of unemployment can affect the level of unemployment.

The Long-Run Phillips Curve Applies When the Economy Is at Full