Question

What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?

a) Upward-sloping; Assumes constant inflation expectations
b) Downward-sloping; Assumes constant inflation expectations
c) Upward-sloping; Assumes adaptive expectations
d) Vertical; Assumes rational expectations

Answer 1

The neoclassical long-run Phillips curve is vertical, indicating no tradeoff between inflation and unemployment in the long run due to rational expectations.

Step-by-step explanation:

The shape of the neoclassical long-run Phillips curve is vertical. This shape is based on the assumption that in the long run, there is no tradeoff between inflation and unemployment. Economists assume rational expectations, where individuals and firms make decisions optimally using all available information. Consequently, the long-run Phillips curve suggests that unemployment will stabilize at the natural rate regardless of inflation. So, the correct answer is (d) Vertical; Assumes rational expectations.