Phillips Curve – Short-Run vs Long-Run Trade-offHL
MacroeconomicsThis diagram illustrates the short-run and long-run Phillips Curve, showing the relationship between inflation and unemployment.
Curves and elements
- 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 which is vertical at the natural rate of unemployment (NRU).
- nRU
- NRU: Natural Rate of Unemployment aka the unemployment level where inflation is stable.
Key explanations
- 1
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.
- 2
SRPC1 represents the initial trade-off, while SRPC2 shows the effect of lower inflation expectations due to successful disinflation policies.
- 3
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.
- 4
Attempts to maintain unemployment below the NRU will lead only to accelerating inflation without reducing unemployment in the long term.
- 5
This framework supports monetarist views that inflation is primarily a monetary phenomenon and long-term policy should aim to reduce inflation expectations.
Example exam question
Using a Phillips Curve diagram, explain the difference between short-run and long-run trade-offs between inflation and unemployment.
Show example answer
In the short run, the Phillips Curve (SRPC) shows an inverse relationship between inflation and unemployment. However, in the long run, the LRPC is vertical at the natural rate of unemployment (NRU), indicating that inflation and unemployment are unrelated in the long term. Policy attempts to reduce unemployment below the NRU will only cause higher inflation, shifting the SRPC outward.
