Distinguish between short run and long run Phillips curve

Distinguish between short run and long run

Phillips curve

According to Friedman and adman phelp rate of in unemployment falls. If there is un-anticipated inflation. But this process is temporary. After some time expectations are adjusted and expected rate of inflation rise again. according to them trade off can only exist under condition of anticipated inflation. If inflation is un-anticipated. There will be no trade of. According to them for every natural unemployment rate. There exist a unique Phillips curves and change in expectation will shift Short run Phillips curves up-ward or down-ward.by this concept we can draw the long run Phillips curve as shown in figure (1.1).

Figure (1.1).

In the above diagram when (NUR) is µ₀ we are having different short run Phillips curves, which are associated with different rate of inflation and µ₀ unique rate of unemployment.

For example, from 0% to 10% and we have different point on these short run Phillips curves. By combining all these points we can obtain a vertical straight line which is called long run Phillips curve as shown in figure (1.2) and figure (1.2A).

figure (1.2).

 Figure (1.2 A)

Figure(1.2A)

In the above two diagram, we can see that trade off exist only in short run Phillips curve. In this situation by using monetary and fiscal policy we can reduce unemployment. But with a higher rate of inflation but in the long run any policy to reduce unemployment will produce higher rate of inflation without reducing unemployment. If inflationary expectation gradually adjust to actual rate of inflation according to the concept of adoptive expectation. There After a monetary implication, rate of un-employment can fall but only to the short run.

There can be a point where actual inflation is equal to expected rate of inflation on short run and long run Phillips curve. For example, point A as in figure (1.3).

Figure (1.3).

In the above diagram point A is related to 60% rate of inflation and unemployment rate is µ₀. now suppose we want to reduce rate of inflation and we have a point S on short run Phillips curves but this point S is unstable because anticipated inflation is not equal to the actual rate of inflation as that of point A.

The economy will move toward point “T” then to ward point “U” and finally towards point “Z” which is a point on the long run Phillips curve and this point actual rate of inflation will be equal to the expected rate of inflation. In this way we can say that expectation play their role.

In the short run Phillips curve and in the long run Phillips curve as shown by the Milton Friedman and phelp brings as back to the classical concept of “AS” (Aggregate supply) curves which is vertical straight line in this case any change in “AD” (aggregate demand) will not affect level of employment. Any increase in “AD” will not affect level of employment. Any increase in “AD” will bring a higher rate of inflation there are some economist who do not believe that long run Phillips curve can have a shape of vertical straight line. All economists agree that long run Phillips curve is steeper Than SRPC (Short run Phillips curve). But all do not agree that (LRPC) long run Phillips curve can be of a vertical shape especially roger bring and Eckstein are of the view that LRPC will shift right ward after a specific rate of inflation which is 8% according to them as shown in figure in 1.4.

Figure (1.4).

Author: Nasir Mehmood Ch                 مصنف: ناصرمحمود چوہدری 

Email: Nasirmehmoodch97@gmail.com