Chapter 6R, Problem 16MCQ

To determine

To find:

Depiction of long run phillips curve

Explanation of Solution

The Phillips Curve shows how unemployment and inflation are related. Let's say the government adopts a program of growth (e.g. lower interest rates). A rise in aggregate demand will lead to a decrease in unemployment and an increase in inflation, according to the traditional model of aggregate demand and supply. However, this hypothesis claims that such a drop in unemployment is just momentary since employees would start to anticipate future price increases and hence demand greater salaries.

Regarding the traditional model, this will cause a shift to the left in the short-run aggregate supply curve, which will lead to a return to the initial level of unemployment but at a higher price level. A rightward shift in the SRPC demonstrates this. Due to the fact that unemployment will eventually return to its natural rate regardless of the price level, we may conclude that the Phillips Curve will be vertical in the long term.

Thus, from the above we can conclude that the correct option is B.