Question : The long-run Phillips curve implies that in the long run, changes in the unemployment rate will:
Option 1: Have no effect on the inflation rate
Option 2: Lead to higher inflation
Option 3: Lead to lower inflation
Option 4: Cause deflation
Correct Answer:
Have no effect on the inflation rate
Solution : The correct answer is (a) Have no effect on the inflation rate
According to the long-run Phillips curve, the unemployment rate and the inflation rate are not directly related in the long run. The long-run Phillips curve is vertical, indicating that the unemployment rate can vary independently of the inflation rate in the long run.
In the long run, the economy tends to converge to its natural rate of unemployment, which is determined by structural and frictional factors rather than changes in the inflation rate. Therefore, changes in the unemployment rate, whether increasing or decreasing, are not expected to have a sustained impact on the inflation rate.
