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    Question

    According to monetarists view, in the long-run, the

    Philips curve
    A Horizonal Correct Answer Incorrect Answer
    B Upward sloping Correct Answer Incorrect Answer
    C Downward sloping Correct Answer Incorrect Answer
    D Vertical Correct Answer Incorrect Answer

    Solution

    Monetarists argue that in the long run there is no Philip curve trade-off as Long Run AS is inelastic. If there is an increase in aggregate demand, then workers demand higher nominal wages. When they receive higher nominal wages, they work longer hours because they feel real wages have increased. (their price expectations are based on last year). However, this increase in AD causes inflation, and therefore, real wages stay the same. When they realise real wages are the same as last year, they change their price expectations, and no longer supply extra labour and the real output returns to its original level. Therefore, unemployment remains unchanged, but we have a higher inflation rate. Hence in long run, the Philip curve is vertical.

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