Final answer:
The short-run expectations-augmented Phillips curve intersects the long-run Phillips curve at the natural rate of unemployment when the expected inflation rate is 2%, indicating that there is no permanent trade-off between inflation and unemployment.
Step-by-step explanation:
Based on the theory of the expectations-augmented Phillips curve, if the expected inflation rate is 2%, the short-run Phillips curve will intersect the long-run Phillips curve at the natural unemployment rate, when the inflation rate is 2%.
This is because the short-run Phillips curve represents the trade-off between inflation and unemployment when people expect a certain level of inflation. In the long run, the relationship is represented by a vertical Phillips curve, indicating that there is no permanent trade-off between inflation and unemployment, as the unemployment rate will revert to the natural rate regardless of the inflation rate.
The theory suggests that the macroeconomic equilibrium can be achieved at different price levels, signifying that various rates of inflation are compatible with the natural rate of unemployment. According to Milton Friedman's neoclassical view, while there may be a temporary trade-off between inflation and unemployment, this does not hold in the long run, leading to the conclusion that the correct answer is B) intersect the long-run Phillips curve at the natural unemployment rate when the inflation rate is 2%.