Question

1. Consider the relationship between inflation, output, and unemployment.
   1. Think about the economy in the long run.
      1. In the long run, what determines unemployment? (2 points)

2. In the long run, what determines output (GDP)? (2 points)

3. In the long run, what determines inflation? (2 points)

1. In the long run, is there a tradeoff between inflation and unemployment? Explain why or why not (3 points).

Answer 1

1). In the long run the unemployment will be at the full employment level of equilibrium and in the other it will be at the natural rate of unemployment. At the full employment level of equilibrium the unemployment is the sum both frictional and structural unemployment. Frictional unemployment occurs in the economy whenever people try to switch between jobs, it is the unemployment resulting from changing jobs. The structural unemployment is if there is a mismatch between the skill the employer need and the skills that the workers possess.

2). In the long run the nominal variables such as the money supply , price level cannot affect the real GDP and only the real variables such as the labour force growth, technological developments and the stock of capital can affect the output in the long run.

3). In the long run the inflation is affected by the rate of money growth and the rate of economic growth.

4). In the long run there is no trade of between the inflation and the unemployment, this is because in the long run the phillphs curve is vertical at the full employment level of output. The inflation and the unemployment are unrelated.