📚 Learning Guide
Long Run Phillips Curve
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Arrange the following concepts in the correct order to explain the relationship illustrated by the Long Run Phillips Curve: A) Economy reaches natural rate of unemployment, B) Inflation expectations stabilize, C) Short-run Phillips Curve shifts, D) No trade-off between inflation and unemployment exists.

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Choose the Best Answer

A

A→B→C→D

B

C→A→B→D

C

A→C→B→D

D

B→A→C→D

Understanding the Answer

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Answer

The Long Run Phillips Curve shows that there is no lasting trade-off between inflation and unemployment. First, the economy eventually reaches what is called the natural rate of unemployment, which is the level of unemployment that exists when the economy is healthy. Once this happens, people's expectations about inflation stabilize because they realize that high inflation does not lead to lower unemployment in the long run. As these expectations become stable, the short-run Phillips Curve shifts, reflecting that policymakers cannot consistently lower unemployment by accepting higher inflation. Ultimately, this leads to the understanding that in the long run, there is no trade-off between inflation and unemployment; they are influenced by different factors.

Detailed Explanation

First, the economy reaches the natural rate of unemployment. Other options are incorrect because This order suggests that the short-run Phillips Curve shifts before the economy reaches natural unemployment; This option places the short-run shift before stabilizing expectations.

Key Concepts

Long Run Phillips Curve
Natural Rate of Unemployment
Short Run Phillips Curve
Topic

Long Run Phillips Curve

Difficulty

medium level question

Cognitive Level

understand

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