Answer to Question #243451 in Macroeconomics for Dhaara

Question

1. Brief note. Draw the short run and long run trade-off between inflation and unemployment

2. How the short run and long run trade_offs are related.

Answer 1

Solution:

1.). A society normally faces a short-run trade-off between unemployment and inflation. If aggregate demand is expanded by lawmakers, they can lower unemployment but only at the cost of high inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment.

The Phillips curve shows the short-run combination of inflation and unemployment that arises as shifts in the aggregate demand curve move the economy along the short-run aggregate demand curve.

The long-run Phillips curve is vertical at the natural rate of unemployment. This is because inflation and unemployment are unrelated in the long run.

 

The short-run and long-run trade-offs between inflation and unemployment have been depicted by the below two graphs.

 

 

 

 

b.). In the short run, inflation and unemployment are inversely related. Therefore, as one quantity increases, the other decreases, and vice versa. In the long run, there is no trade-off between inflation and unemployment.