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Explore TopicChoose the Best Answer
A
A country experiences a temporary increase in inflation due to increased consumer demand, leading to lower unemployment in the short run.
B
An economy at its natural rate of unemployment where inflation expectations are stable and not influenced by short-term shocks.
C
A government implements a stimulus package that reduces unemployment but causes a rise in inflation expectations.
D
A central bank raises interest rates to combat inflation, resulting in a decrease in unemployment in the short term.
Understanding the Answer
Let's break down why this is correct
Answer
The Long Run Phillips Curve shows that in the long run, there is no trade-off between inflation and unemployment; this means that changes in inflation do not affect the level of unemployment. For example, if a country experiences rising inflation due to increased demand for goods, the unemployment rate may initially drop as businesses hire more workers to meet that demand. However, over time, as inflation expectations adjust, companies will not keep hiring at the same rate, and unemployment will return to its natural rate. This illustrates that in the long run, no matter how much inflation increases, it does not lead to a sustained decrease in unemployment. Therefore, the Long Run Phillips Curve remains vertical, showing that the economy will eventually settle at a certain level of unemployment regardless of inflation changes.
Detailed Explanation
In this scenario, the economy is at its natural rate of unemployment. Other options are incorrect because This option suggests that a temporary rise in inflation can lower unemployment; Here, a stimulus package lowers unemployment but raises inflation expectations.
Key Concepts
Long Run Phillips Curve
Natural Rate of Unemployment
Inflation Expectations
Topic
Long Run Phillips Curve
Difficulty
medium level question
Cognitive Level
understand
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