Macroeconomics
In summary, the short-run Phillips curve highlights the relationship between inflation and unemployment in the short term and how government policies can influence this trade-off. The trade-offintheshortrunisthatpolicymakerscanpotentiallyuseexpansionaryfscalormonetary policies to reduce unemployment, but this often comes at the cost of higher inflation . The Long-Run Phillips Curve (LRPC) In the long run, the Phillips Curverelationshiptendstobreakdown. Thisisbecause expectations play a crucial role in shaping economic behavior. Individualsandfrmsmakedecisionsbasedontheir expectations of future inflation rates. Whenpeopleexpecthigherinflation,theyadjusttheirbehavioraccordingly. Forexample,workersmight demand higher wage increases to keep up with expected inflation, and frms may raise prices preemptively. Recallthatthisispossibleinthelongrunbecausepricesarenolongersticky.Thismeans that the short-run inverse relationship between inflationandunemploymentdoesnotholdinthelong run when there is no permanent trade-off between inflation and unemployment over extended periods. In the long run, the inflation rate tends to equal the expected inflation rate. Similarly, unemployment tends to reach its natural rate , natural rate of unemployment (NRU) or full employment. The long-run Phillips curve LRPC is, therefore, a vertical curve at the natural rate of unemployment.
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