Why is the long-run Phillips curve vertical at the NAIRU?

• A. below; ever-decelerating
• B. above; ever-accelerating
• C. equal to; zero
• D. below; ever-accelerating

Answer: (D)

In the long run, there is no permanent trade-off between inflation and unemployment once expectations adjust; the economy gravitates to the NAIRU, the unemployment rate at which inflation remains stable. If unemployment falls below the NAIRU, the tight labor market pushes wages and prices up, so inflation accelerates. That rising inflation changes expectations and behavior until unemployment moves back toward the NAIRU, leaving the long-run relationship vertical at that point. The option reflecting this idea says that unemployment is below the NAIRU and inflation is ever-accelerating. The other descriptions misstate how inflation behaves when unemployment is above the NAIRU or mischaracterize the long-run relationship.