Draw a long-run Phillips curve. What does it say about the relationship between inflation and un

step 1 If we recall that the Phillips curve, which is essentially going to be a relationship between in

Draw a long-run Phillips curve. What does it say about the...

Key Concepts

Phillips Curve

The Phillips Curve is an economic concept that illustrates an inverse relationship between the rate of inflation and the unemployment rate, suggesting that lower unemployment comes with higher inflation and vice versa. This relationship is typically observed in the short run, where real variables can deviate from their natural levels due to various market dynamics.

Long-run Phillips Curve

The Long-run Phillips Curve depicts the relationship between inflation and unemployment over a longer period, where expectations fully adjust. Unlike the short-run curve, it is vertical, indicating that in the long run there is no trade-off between inflation and unemployment; the economy tends to settle at its natural rate of unemployment regardless of the inflation rate.

Natural Rate of Unemployment

The Natural Rate of Unemployment is the level of unemployment consistent with a stable rate of inflation. It represents the normal churn of the labor market and is not affected by inflation, serving as the pivot around which both the short-run and long-run Phillips Curves are analyzed.

Short-run vs. Long-run Trade-off

In the short run, policy actions that lower unemployment may lead to higher inflation, indicating a trade-off between the two. However, in the long run, due to adjustments in inflation expectations and other economic factors, this trade-off disappears, as reflected by the vertical long-run Phillips Curve which shows that monetary policy cannot permanently lower unemployment below its natural rate.

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