Short-Run Phillips Curve vs Long-Run Phillips Curve
Short-Run Phillips Curve and Long-Run Phillips Curve are two Financial Sector & Loanable Funds concepts in AP Economics that students often mix up. In short: short-run phillips curve is a curve showing the inverse relationship between inflation and unemployment in the short run. Meanwhile, long-run phillips curve is the long-run Phillips curve is vertical at the natural rate of unemployment, showing no permanent trade-off between inflation and unemployment. Here is how they compare side by side.
A curve showing the inverse relationship between inflation and unemployment in the short run.
It suggests that policymakers may face a trade-off: lower unemployment can be achieved at the cost of higher inflation, and vice versa. This relationship breaks down in the long run due to adaptive expectations and shifts in the curve from supply shocks or changing expectations.
The long-run Phillips curve is vertical at the natural rate of unemployment, showing no permanent trade-off between inflation and unemployment.
In the long run, expectations adjust, so trying to push unemployment below the natural rate only raises inflation. It corresponds to long-run aggregate supply at potential output. Only supply-side changes can shift it.