Since in the short run AS curve (Phillips Curve) is quite flat, therefore, a trade off between unemployment and inflation rate is possible. nw = nM, U = UN and there is no relationship between nw and U (UN is the natural rate of unemployment). The long run Phillips curve is a vertical line at the natural rate of unemployment, so inflation and unemployment are unrelated in the long run. B) prices are flexible in the long run, causing no relationship between unemployment and inflation. b) there is a trade-off between unemployment and inflation. This shift leads to a longer-term theory often referred to as either the "long-run Phillips curve" or the non-accelerating rate of unemployment (NAIRU). Explanation of Solution At natural rate of unemployment, the long-run Philips curve is a straight line; however, a short-run Philips curve is a L-shaped curve. c) lower unemployment can be sustained indefinitely with continuous expansionary policies. C) inflation stimulates the economy, and this outcome reduces the unemployment rate. The long-run Phillips curve shows that: a) the natural rate of unemployment occurs when the actual inflation rate equals the expected inflation rate. Unit 5: Long-Run Consequences of Stabilization Policies 5.2: The Phillips Curve. Thus, the vertical long-run aggregate supply curve and the vertical long-run Phillips curve both imply that monetary policy influences nominal variables (the price level and the inflation rate) but not real variables (output and unemployment). Let's review. The long-run Phillips curve is vertical, suggesting that there is no tradeoff between unemployment and inflation. MECHANICS BEHIND LONG RUN PHILLIPS CURVE. It is actually just a reflection of the AD/AS graph. It is generally but not universally accepted that the long run Phillips curve is vertical at the natural rate of unemployment. The Phillips curve is a graph that shows how inflation rates and unemployment rates are related to each other, both in the short-run and long-run. The Phillips curve illustrates the relationship between the rate of inflation and the unemployment rate. Lesson Summary. A) monetary policy has real effects in the long-run. Most economists now agree that in the long run there is no tradeoff between inflation and unemployment. • The long-run Phillips curve (LPC). But because the Phillips curve is vertical, the rate of unemployment is the same at these two points. The long-run Phillips curve could be shown on Figure 1 as a vertical line above the natural rate. In the classical model, L and the real wage are determined from equilibrium conditions in the labor market. The vertical long run Phillips curve concludes that unemployment does not depend on the level of inflation. The difference between short-run and long-run phillips curve with the help of an aggregate supply and demand diagram. 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