Monetary Policy in Southland
In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years.
-Refer to Monetary Policy in Southland. Suppose Southland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Southland would be above the natural rate.

Question

Quizplus · Accepted Answer

The long-run Phillips curve suggests that there is no trade-off between inflation and unemployment in the long run, implying that unemployment would be at the natural rate regardless of inflation. The Classical dichotomy also separates real and nominal variables, suggesting inflation does not affect real variables like unemployment in the long run. Therefore, neither implies that unemployment would be above the natural rate.