Consider the long-run Phillips Curve relationship in modern macroeconomic theory. Which of the following assertions is correct regarding its graphical representation and policy implications?

💡 Solution & Explanation

The long-run Phillips curve is vertical at the natural rate of unemployment, aligning with the Friedman-Phelps hypothesis that adaptive or rational expectations neutralize monetary policy impacts on real output over time. While a short-term trade-off exists between inflation and unemployment due to temporary price misperceptions, economic agents eventually adjust their inflation expectations. Consequently, attempts by central authorities to maintain unemployment below its natural rate through continuous monetary expansion generate accelerating inflation without sustained employment gains. The natural rate of unemployment is determined by structural labor market characteristics.