Question

Explain why, theoretically, in the long run, there is no conflict between maintaining employment and stable inflation. Graphs will be helpful in answering this question.

Answer 1

This can be explained by the Long run Philips curve.In the short run the Philips curve is downward sloping,so,there is trade off between reducing inflation and increasing unemployment.However,in the long-run the Philips curve is a vertical line.There is no trade off between unemployment and inflation.

Any policy would affect unemployment and inflation rate only in the short run.In the long run,the economy adjusts to its natural rate.