The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.

Question

BlackTom AI · Accepted Answer

The long-run Phillips curve is vertical at the natural rate of unemployment, reflecting monetary neutrality.

1) Relevant knowledge points and concepts
- Classical dichotomy: nominal and real variables are separate in the long run; changes in the money supply affect only nominal variables (prices, nominal wages) and not real variables (output, unemployment).
- Monetary neutrality: money is neutral in the long run — only price levels and inflation rates change, not real output or unemployment.
- Phillips curve frameworks: the original short-run Phillips curve showed a tradeoff between inflation and unemployment; the expectations-augmented Phillips curve (Friedman–Phelps) implies the tradeoff is only short run, and in the long run the curve is vertical at the natural rate of unemployment.

2) Step-by-step reasoning
- If policymakers expand the money supply, nominal spending and inflation rise.
- Workers and firms form expectations; in the short run if inflation is unexpected, real wages fall temporarily and unemployment can deviate from its natural rate.
- Over time, inflation expectations adjust upward. Once expectations fully incorporate the inflation rate, real wages return to their equilibrium and unemployment returns to the natural rate.
- Thus any change in inflation (a nominal variable) does not affect long-run unemployment (a real variable).

3) Intermediate “calculations” (conceptual)
- Short run: unexpected Δinflation → temporary Δ(unemployment).
- Long run: expected inflation adjusts → Δ(expected inflation) = Δ(actual inflation) → no persistent change in unemployment.
- Therefore long-run Phillips curve: unemployment = natural rate, independent of inflation.

4) Why the correct answer is correct
This logic directly embodies monetary neutrality and the classical dichotomy: nominal changes (inflation) do not change real variables (unemployment) in the long run, so the long-run Phillips curve must be vertical.

5) Why the other option is incorrect
Saying False would assert a permanent tradeoff between inflation and unemployment, contradicting the expectations-augmented theory and the classical dichotomy; empirical and theoretical work show any tradeoff is only short-run.

6) Conclusion
These points confirm the correct answer is True, matching the provided answer.

The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.Single choice

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