Chapter 34, Problem 2CYU

To determine

The reason for no long-run trade-off between unemployment and inflation.

Explanation of Solution

In the long run, there would not be a trade-off between unemployment and inflation because unemployment returns, in the long run, would move or stable to the natural rate, but the inflation rate would reach its higher level.

It occurs because there is a supply shock in the market and any changes in the factors such as inflationary expectations and supply shocks would directly affect the Philips curve. In this case, the Philips curve would remain vertical as there is no long-run relationship or trade-off between inflation and unemployment rate in the economy. Therefore, in the long run, this curve remains at the natural rate of unemployment in the economy without any effect on inflation.

This trade-off between unemployment and inflation occurs only in the short run when an increase in unemployment lowers inflation and a decrease in the unemployment rate increases the inflation rate but these factors are unrelated in the long run.

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. And unemployment is the rate of unemployed people who do not have any work or source to employ in the economy.