Macroeconomics
The LRPC is an important concept in macroeconomics that differs from the SRPC. While the SRPC suggestsaninverserelationshipbetweeninflationandunemploymentintheshortterm,theLRPC tellsusthatthereisnosuchtrade-offinthelongrun. Instead,itis vertical ,indicatingthat inthelong run, changes in the inflation rate do not have a permanent impact on the unemployment rate. ThosewhobelievethattheaggregatesupplycurveisverticalinthelongrunalsoassertthatthePhillips curveisverticalinthelongrunattheNaturalRateofUnemployment(NRU).Inthisscenario,anincrease inaggregatedemandwouldonlyresultinanincreaseinthepricelevel,leadingtoinflation,withoutany change in the unemployment rate. The rationale behind this is that when the unemployment rate is pushed below the NRU, wages start to rise, consequently driving up costs. This, in turn, results in a decrease in output, pushing the unemployment rate back up to the NRU, where the economy is considered to be at full employment. Rememberthatthenaturalrateofunemployment(NRU)istherateofunemploymentthatprevailsinthe economy when there is neither inflationnordeflation;it'stheunemploymentratethatcorrespondsto the economy's full potential output. In the long run, the economy tends tooperateclosetoitsfull potential. Any attempt toreduceunemploymentbelowthenaturalratebyboostingdemand(e.g., through expansionary fscal or monetary policy) willleadtohigherinflation,butnotpermanently lower unemployment . In the long run, people and businesses adjust their expectations based on past experiences and economic conditions. If inflation has been consistently high, people and frms come to expecthigher prices, and this gets factored into wage and price-setting decisions. For instance, if people expect inflationtobehighinthefuture,theywillnegotiateforhigherwages.Aswagesconstitutecostsforfrms, the anticipation of increased wage demands prompts them to raise their prices to cover rising costs. Moreover, when frms anticipate thatotherbusinesseswillincreasetheirprices,theytendtofollowsuit. This dynamic creates self-fulflling expectations. PolicyNeutrality: TheLPRCimpliesthat,inthelongterm,monetaryorfscalpoliciesaimedatachieving lower unemployment rates may only result in higher inflation without any lasting reduction in
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