IBonomicsPhillips Curve – Short-Run vs Long-Run Trade-off
This diagram illustrates the short-run and long-run Phillips Curve, showing the relationship between inflation and unemployment.
srpc1
SRPC1: Initial short-run Phillips Curve showing inverse inflation-unemployment trade-off.
srpc2
SRPC2: New short-run Phillips Curve after expectations adjust (e.g., following disinflation policies).
lrpc
LRPC: Long-run Phillips Curve — vertical at the natural rate of unemployment (NRU).
nru
NRU: Natural Rate of Unemployment — the unemployment level where inflation is stable.
The short-run Phillips Curve (SRPC) shows an inverse relationship between inflation and unemployment — lower unemployment can be achieved at the cost of higher inflation, and vice versa.
SRPC1 represents the initial trade-off, while SRPC2 shows the effect of lower inflation expectations due to successful disinflation policies.
The Long-Run Phillips Curve (LRPC) is vertical at the natural rate of unemployment (NRU), indicating that in the long run, there's no trade-off between inflation and unemployment.
Attempts to maintain unemployment below the NRU will lead only to accelerating inflation without reducing unemployment in the long term.
This framework supports monetarist views that inflation is primarily a monetary phenomenon and long-term policy should aim to reduce inflation expectations.
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