Long Run Phillips Curve Flashcards
(18 cards)
What does the Long-Run Phillips Curve (LRPC) show?
A vertical curve at the Natural Rate of Unemployment (NRU) — indicating no long-run trade-off between inflation and unemployment.
Why is the LRPC vertical?
Because in the long run, wage expectations adjust. Any attempt to keep unemployment below the NRU leads to rising inflation, not sustained employment gains.
How does the economy return to YFE after an AD shock?
Initially, AD↑ → Unemployment↓ and Inflation↑ → Workers revise wage expectations ↑ → SRAS shifts left → Higher costs and inflation → Output returns to YFE.
How does this adjustment appear on the Phillips Curve?
The SRPC shifts right (e.g. SRPC1 → SRPC2), so although inflation is higher, the unemployment rate returns to the NRU.
What is the role of expectations in the Monetarist view of the Phillips Curve?
Inflation expectations adjust over time. Workers and firms begin to expect higher inflation and demand wage increases, pushing SRPC outward and erasing any short-run gains in employment.
What happens to inflation when the economy returns to YFE after a demand boost?
Inflation remains higher — this is called accelerating inflation unless monetary/fiscal policy tightens.
How do we draw the LRPC using the SRPCs?
Connect all the long-run equilibrium points (where AD/AS returns to YFE) from shifting SRPCs — this forms the vertical LRPC at NRU.
What policy implication does the LRPC suggest?
Policymakers cannot permanently reduce unemployment below the NRU without causing accelerating inflation — supporting inflation-targeting over fine-tuning.
What economic school supports the LRPC concept?
Monetarist economists, like Milton Friedman, who argue that demand-side policies cause only short-term changes in unemployment.
How does the LRPC relate to the LRAS curve?
Both are vertical at full employment (YFE/NRU), representing the economy’s long-run output capacity.
What does the LRPC show?
The economy’s long-run output at the Natural Rate of Unemployment (NRU) — full, sustainable use of factors of production (FOP).
Can the economy deviate from the NRU in the short run?
Yes — short-run deviations occur, but the economy always returns to the NRU in the long run due to expectations and wage adjustments.
What is the NAIRU?
The Non-Accelerating Inflation Rate of Unemployment — the unemployment rate at which inflation remains stable over time.
What is the only way to increase long-run output (shift LRPC left)?
Through supply-side policies (education, innovation, deregulation, investment incentives) that raise productive capacity and reduce structural unemployment.
Why can’t we use demand-side policy to increase long-run growth?
Because in the long run, the economy returns to YFE (full employment) — boosting AD just leads to inflation, not more output.
What shape is the LRPC and why?
Vertical, because in the long run, unemployment is determined by supply-side factors, not demand.
What does the LRPC represent in terms of inflation and unemployment?
The trade-off disappears in the long run — any attempt to lower unemployment below the NRU just results in higher inflation.
What’s the key conclusion of the LRPC for economic policy?
Long-term growth comes only from improving LRAS, not boosting AD — so focus should be on supply-side reforms.
