Answer to Question #244194 in Macroeconomics for Nithya

Question

Brief note. How the short run and long run trade_offs are related

Answer 1

With changes in inflation, the unemployment rate tends to stay at its natural rate in the long run. As a result, there is no trade-off between the rate of inflation and the rate of unemployment. In the near run, however, changes in money growth influence inflation and, to a lesser extent, the unemployment rate. As a result, the Phillips curve in the short run confronts a temporary trade-off between inflation and unemployment rate. However, as predicted inflation catches up with actual inflation, the economy's short-term Phillips curve shifts back to the long-run Phillips curve.