Question

Why is there no long - run trade - off between unemployment and inflation? In other words, why is the long-run Phillips curve vertical meaning there is no trade-off between unemployment and inflation?

Answer 1

With the help of either Keynesian perspective or monetarist perspective by Milton Friedman, we can easily understand why there is no long-run trade off between unemployment, and inflation.

According to Keynesian perspective,

We know, labor supply depends on the expected real wage.

In the short run due to an expansionary policy price level and wages rise, workers believe that the real wages have risen, on the other hand, due to an increase in aggregate demand, demand for labor increases, and workers are willing to work at the new increased wage rate. They do not see the rise in price level in the short run.

However, in the long run, workers realize the increase in price level and demand higher wages which leads to an increase in unemployment.