Question

So let's say that this European Central Bank, the European Central Bank expects the natural unemployment rate to be 6 percent, and the actual unemployment rate is 5.5 percent.

A.) Use the Phillips curve illustration to determine what happens to inflation and unemployment over a long period of time.

Answer 1

In the long period higher unemployment will lead to

The curve illustrates that there is no relationship between the unemployment rate and inflation in the long-run; the long run curve is vertical at the natural rate of unemployment.