Question

What is the interpretation of the Phillips curve in the short run and long run? Is...

What is the interpretation of the Phillips curve in the short run and long run? Is there a trade off in the long run? Explain.

Homework Answers

Answer #1
  • The Philips curve of an economy shows the relationship between Inflation rate and unemployment rate within the economy.
  • In the short run, there is a trade off between these two variables. That is there is an inverse relationship between the two in the short run.
  • That is, When inflation Increases unemployment rate decreases within the economy and when unemployment rate increases, the inflation rate decreases.
  • In the long run, the aggregate supply curve remains inelastic. That is, in the long run there is no such trade off between the two variables which is illustrated by a vertical long run Philips curve.
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