Long-Run Phillips Curve (LRPC)

Definition

The long-run Phillips curve (LRPC) is a macroeconomic concept that describes the long-term relationship between the unemployment rate and the rate of inflation. It suggests that in the long run, there is no trade-off between inflation and unemployment, and the economy will naturally gravitate towards a natural rate of unemployment regardless of the inflation rate.

5 Must Know Facts For Your Next Test

1. The LRPC is vertical, indicating that in the long run, there is no trade-off between inflation and unemployment.
2. The LRPC is located at the natural rate of unemployment, which is the level of unemployment that the economy will return to in the long run.
3. Monetary policy can affect the short-run Phillips curve by influencing the rate of inflation, but it cannot affect the long-run position of the LRPC.
4. The LRPC reflects the idea that in the long run, the economy will always return to the natural rate of unemployment, regardless of the inflation rate.
5. The LRPC is a key concept in the neoclassical perspective on macroeconomic policy, which emphasizes the importance of supply-side factors and the natural self-adjusting properties of the economy.

Review Questions

• Explain the key features of the long-run Phillips curve and how it differs from the short-run Phillips curve.
  • The long-run Phillips curve (LRPC) is a vertical line located at the natural rate of unemployment, indicating that in the long run, there is no trade-off between inflation and unemployment. This is in contrast to the short-run Phillips curve, which shows an inverse relationship between inflation and unemployment. The LRPC reflects the neoclassical view that the economy will naturally gravitate towards the natural rate of unemployment, regardless of the inflation rate, and that monetary policy cannot permanently affect the level of unemployment in the long run.
• Describe how the long-run Phillips curve relates to the policy implications of the neoclassical perspective on macroeconomic policy.
  • The long-run Phillips curve is a key concept in the neoclassical perspective on macroeconomic policy, which emphasizes the importance of supply-side factors and the natural self-adjusting properties of the economy. The vertical LRPC suggests that in the long run, there is no trade-off between inflation and unemployment, and that the economy will always return to the natural rate of unemployment regardless of the inflation rate. This implies that activist monetary and fiscal policies aimed at reducing unemployment below the natural rate will only result in higher inflation, and that the best policy is to focus on maintaining price stability and allowing the economy to self-adjust to the natural rate of unemployment.
• Analyze how the long-run Phillips curve informs the neoclassical perspective on the effectiveness of monetary policy in achieving macroeconomic objectives.
  • The long-run Phillips curve is a central tenet of the neoclassical perspective on macroeconomic policy, which holds that in the long run, monetary policy cannot affect the level of unemployment. The vertical LRPC indicates that the economy will always return to the natural rate of unemployment, regardless of the inflation rate. This suggests that while monetary policy can influence the short-run Phillips curve by affecting the rate of inflation, it cannot permanently alter the long-run position of the LRPC or the natural rate of unemployment. As a result, the neoclassical view is that the primary objective of monetary policy should be to maintain price stability, rather than attempting to manipulate employment levels, as this would be futile in the long run and only result in higher inflation.

Related terms

Phillips Curve:

The Phillips curve is a graphical representation of the inverse relationship between the unemployment rate and the rate of inflation in an economy.

Natural Rate of Unemployment:

The natural rate of unemployment is the level of unemployment that the economy gravitates towards in the long run, determined by factors such as labor market frictions and structural characteristics.

Monetary Policy:

Monetary policy refers to the actions taken by a country's central bank to influence the money supply and interest rates, with the goal of achieving macroeconomic objectives such as price stability and full employment.