Question

The Long-Run Phillips Curve: The Natural Rate of Unemployment, based on the
assumption of a vertical long run aggregate supply curve.

Answer 1

It is true that vertical long run Philips curve is based on vertical long run aggregate supply curve. Neoclassical economist says that shift in aggregate demand curve does not effect output level wehen aggregate supply curve is vertical while it only affects price level. You can see in the below diagram that rightward shift of demand curve raise price level from P to P1 while output remains same at Y*.

Employment / Unmployment level remains the same when output does not change. It says that change in price will lead to change in inflation rate while causing no change in employment level which describes long run philips curve.

answered by: anonymous