Answer to Question #244191 in Macroeconomics for Nithya

Question

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

Answer 1

Long run Phillips curve

The above graph shows the long-run trade-off between inflation and unemployment. In the long run, there is no trade-off, as the economy must return to the natural rate of unemployment on the long-run Phillips curve.

In the short run, the economy can move along a short-run Phillips curve, like SRPC₁. But, over time (as inflation expectations adjust) the short-run Phillips curve will shift to return the economy to the long-run Phillips curve, for example shifting from SRPC₁ to SRPC₂.

Relation Between short-run and long-run trade off:

As discussed above in long-run there is no relationship between inflation and unemployment and in long run natural rate of unemployment prevails but there is a trade-off between higher inflation and lower unemployment in the short run. The trade-off between inflation and unemployment disappears in the long run.