Demand policies targeted to reduce the unemployment become ineffective in presence of the following :
Vertical phillips curve
Option 1 — Vertical Phillips curve is correct.
The Phillips curve depicts the relationship between unemployment and inflation. A downward-sloping (short-run) curve implies a trade-off: expansionary demand policy can lower unemployment at the cost of higher inflation. A vertical Phillips curve is the long-run curve at the natural rate of unemployment.
When the curve is vertical, there is no trade-off — unemployment stays at its natural rate regardless of aggregate demand. Any demand-side stimulus then raises only prices (inflation), leaving unemployment unchanged. Hence demand-management policies aimed at reducing unemployment become ineffective.
Why the other options are wrong: Money illusion actually makes demand policy temporarily effective, because workers misread nominal wage rises as real gains and supply more labour. A horizontal Phillips curve would imply the economy can expand output with no inflation cost, so demand policy would be highly effective. Since option 1 correctly identifies the condition, "none of the above" is ruled out.
Takeaway: A vertical long-run Phillips curve at the natural rate leaves demand policy powerless over real unemployment.
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