What would be the initial impact of an increase in aggregate demand when an economy is at its natural rate of unemployment?
A) An increase in unemployment and an increase in prices
B) An increase in unemployment and a decrease in prices
C) A decrease in unemployment and an increase in prices
D) A decrease in unemployment and a decrease in prices
You know Long run phillips curve is not quite just phillips curve.
Its full name is Friedman-phelps Expecations Augmented Phillips curve which explains why what happens when AD is increased at NAIRU. Initial impact would be a decrease in U/E and increase in inflation, over the long term the U/E will return back to the NAIRU.
Go read ur econ text books if you don't get this. A is WRONG.