Suppose the natural unemployment rate is 4 percent and the ...

[DelorasTo]

Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the figure below, illustrate the long-run Phillips curve.
 
  What does the long-run Phillips curve reveal abut the long-run tradeoff between inflation and unemployment?

Question 2

As the cost of resources goes up, producers ________ production, which drives prices ________.
 
  A) increase; up
  B) increase; down
  C) decrease; up
  D) decrease; down

[BAOCHAU2803]

Answer to Question 1

The long-run Phillips curve is illustrated in the above figure. It is vertical at the natural unemployment rate. The fact that the long-run Phillips curve is vertical means that in the long run there is no tradeoff between inflation and unemployment. In other words, in the long run higher inflation does not decrease unemployment nor does low inflation increase unemployment.

Answer to Question 2

C

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