Following a decline in the inflation rate, once long-term wage contracts are renegotiated and all prices in the economy adjust to their new equilibrium:
A)the economy will move up the short-run Phillips curve.
B)the short-run Phillips curve will shift to the left.
C)the economy will return to the vertical Phillips curve.
D)the aggregate supply curve will shift to the right.
E)the aggregate demand curve will shift to the right.

Question

Quizplus · Accepted Answer

Once all prices in the economy adjust to their new equilibrium after a decline in the inflation rate and long-term wage contracts are renegotiated, the economy will return to the vertical Phillips curve, indicating that there is no trade-off between inflation and unemployment in the long run. This is because in the long run, nominal wages and other input prices fully adjust to changes in the overall price level, leading to the return of the natural rate of unemployment.

Following a Decline in the Inflation Rate, Once Long-Term Wage