Vertical Long-Run Phillips Curve

Definition

The vertical long-run Phillips curve is a graphical representation of the relationship between inflation and unemployment in the long run. It depicts a vertical line, indicating that there is no long-term tradeoff between inflation and unemployment, contrary to the short-run Phillips curve.

5 Must Know Facts For Your Next Test

1. The vertical long-run Phillips curve suggests that in the long run, there is no tradeoff between inflation and unemployment.
2. The vertical long-run Phillips curve implies that the economy will always return to the natural rate of unemployment, regardless of the level of inflation.
3. The vertical long-run Phillips curve is a reflection of the classical economic theory, which assumes that the economy will naturally gravitate towards full employment in the long run.
4. The vertical long-run Phillips curve suggests that monetary policy can only affect the level of inflation, but not the level of unemployment in the long run.
5. The vertical long-run Phillips curve is an important concept in understanding the limitations of monetary policy in influencing long-term economic outcomes.

Review Questions

• Explain the key characteristics of the vertical long-run Phillips curve and how it differs from the short-run Phillips curve.
  • The vertical long-run Phillips curve is a graphical representation that shows there is no long-term tradeoff between inflation and unemployment, unlike the short-run Phillips curve. The vertical long-run Phillips curve depicts a vertical line, indicating that the economy will always return to the natural rate of unemployment, regardless of the level of inflation. This suggests that monetary policy can only affect the level of inflation, but not the level of unemployment in the long run. This is in contrast to the short-run Phillips curve, which shows an inverse relationship between inflation and unemployment, implying that policymakers can use monetary policy to influence both inflation and unemployment in the short term.
• Analyze the implications of the vertical long-run Phillips curve for the effectiveness of monetary policy in influencing long-term economic outcomes.
  • The vertical long-run Phillips curve suggests that monetary policy has limited effectiveness in influencing long-term economic outcomes, particularly the level of unemployment. According to the classical economic theory, the economy will naturally gravitate towards full employment in the long run, regardless of the level of inflation. This implies that monetary policy can only affect the level of inflation, but not the level of unemployment in the long run. The vertical long-run Phillips curve suggests that attempts by policymakers to use monetary policy to reduce unemployment below the natural rate will only result in higher inflation, without any long-term impact on unemployment. This highlights the importance of understanding the limitations of monetary policy and the need for policymakers to focus on structural reforms and other policies to address long-term economic challenges.
• Evaluate the role of the vertical long-run Phillips curve in the development of macroeconomic theory and its influence on the formulation of economic policies.
  • The concept of the vertical long-run Phillips curve has played a significant role in the evolution of macroeconomic theory and the formulation of economic policies. It represents a fundamental shift from the earlier Keynesian view, which suggested a stable tradeoff between inflation and unemployment. The vertical long-run Phillips curve, rooted in classical economic theory, challenges this notion and suggests that in the long run, the economy will always return to the natural rate of unemployment, regardless of the level of inflation. This has important implications for the effectiveness of monetary policy, as it implies that policymakers cannot use monetary policy to permanently influence the level of unemployment. The vertical long-run Phillips curve has influenced the development of monetarist and new classical macroeconomic theories, which emphasize the importance of maintaining price stability and the limitations of using monetary policy to achieve long-term economic goals. This understanding has also shaped the formulation of economic policies, with central banks focusing more on controlling inflation rather than targeting specific levels of unemployment. Overall, the vertical long-run Phillips curve has been a critical concept in shaping our understanding of the long-term dynamics of the economy and the role of economic policy.

Related terms

Phillips Curve:

The Phillips curve is an economic model that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Long-Run Equilibrium:

The long-run equilibrium is the state of an economy where all adjustments have been made, and there is no tendency for change in the key economic variables.

Natural Rate of Unemployment:

The natural rate of unemployment is the level of unemployment that exists in an economy due to normal economic forces, such as the time it takes for workers to find new jobs.