Question

According to the long-run Phillips Curve:

a. an increase in unemployment occurs when inflation increases.
b. an increase in unemployment occurs when inflation decreases.
c. fiscal and monetary policies that impact aggregate demand do not impact the natural rate of unemployment.
d. fiscal and monetary policies that impact aggregate demand help increase the natural rate of unemployment.
e. fiscal and monetary policies that impact aggregate demand help decrease the natural rate of unemployment.

Answer 1

c. fiscal and monetary policies that impact aggregate demand do not impact the natural rate of unemployment.

Step-by-step explanation:

Short run Philips Curve is downward sloping, due to inverse relationship between unemployment rate & inflation rate. High economic activity implies more inflation rate, less unemployment. Low economic activity implies less inflation rate, more unemployment.

However, the inverse relationship between inflation & unemployment is only in short run & not in long run. In long run, this inflation - unemployment trade off doesn't exist. So, any fiscal or monetary policy affecting aggregate demand & consecutively inflation rate, do not affect the natural rate of unemployment (combination of frictional & structural unemployment rate) in long run.