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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