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QUESTION

ShortrunPhillipscurveisanotherexpressionofshortrunaggregatesupplycurveand longrunPhillipscurveisanotherexpressionoflongrunaggregatesupply? Doyouagreewiththisstatement.Supportyouranswerwithargumentsanddiagrams?

ANSWER
Ineconomics,thePhillipscurveisahistoricalinverserelationshipbetweentherateof unemploymentandtherateofinflationinaneconomy.Statedsimply,thelowerthe unemploymentinaneconomy,thehighertherateofinflation.Whileithasbeenobservedthat thereisastableshortruntradeoffbetweenunemploymentandinflation,thishasnotbeen observedinthelongrun. Intheshortrun,thesupplyofoutputdependsonthenaturalrateofoutputandonthe differencebetweenthepricelevelandtheexpectedpricelevel.Thisrelationshipisexpressed intheaggregatesupply. ThePhillipscurveisanalternativewaytoexpressaggregatesupply.Itprovidesasimpleway toexpressthetradeoffbetweeninflationandunemploymentimpliedbytheshortrun aggregatesupplycurve.ThePhillipscurvepositsthatinflation dependsontheexpected inflationratee,oncyclicalunemploymentuun,andonsupplyshocks Bothtellusthesameinformationinadifferentway: bothimplyaconnectionbetweenrealeconomicactivity andunexpectedchangesinprices. TheSRASandSRPhillipscurvesreflectfixedcosts(a conditionoftheeconomicshortrun).TheSRAScurve showsthatproductioncanbeincreasedintheshortrun byincreasingemployment.TheshortrunPhillipscurve showstheeffectontheinflationrateofthatincreasein employment.TheLRAScurvereflectsthelevelofoutput that can be sustained given "full" employment, regardless of the price level. The LR Phillips Curve reflectsthe factthatthe"full" level of employment is dependentonthenaturalrateofunemployment,which

isalsoindependentofthepricelevel.So,insum,theshortruncurvesreflectthefactthatthe priceleveldoesfactorintoeconomicdecisionsintheshortrunwhilethelongruncurvesshow thatthemostimportantaspectsoftheeconomy,employmentandproduction,are independentofthepriceleveloverthelongrun. Iftheeconomyisatequilibrium,thenanincreaseordecreaseinoutputisreallyanincreaseor decreaseinunemployment,andthetwocurvesaresimplyamirrorofeachotheroneisin levelstheotherisin changes. Both curves have the same philosophy at their root - that an increase in aggregate demand increases output and prices in the short run, but only increases prices in the long run. The most popular explanation - which is not entirely discredited is that wages lag behind prices so that an increase in prices reduces the real wage. Firms then expand output until labor realizes it has been had, and pushes for higher wages. TheLongRunPhillipsCurve ThelongrunPhillipscurve(LRPC)showsthe relationshipbetweeninflationandunemployment whentheeconomyisatfullemployment.As illustratedinthefigure,thelongrunPhillipscurve isverticalatthenaturalunemploymentrate. In the long run, higher or lower inflation has no effect on the unemployment rate. This result is analogoustotheconclusionfromthe ASAD model thatinlongrun,regardlessofthepricelevel,real GDPequalspotentialGDPandtheeconomyisatfull employment.

GRAPHICALLY

TheShortRunPhillipsCurveillustratestheTradeoffbetweenInflationandUnemployment thatoccursastheADcurvetraverses(eitherupordown)theUPWARDslopingrangeofSRAS.

CONCLUSION
TheSRASandSRPhillipscurvesreflectfixedcosts(aconditionoftheeconomicshortrun). The SRAS curve shows that production can be increased in the shortrun by increasing employment.TheshortrunPhillipscurveshowstheeffectontheinflationrateofthatincrease inemployment.TheLRAScurvereflectsthelevelofoutputthatcanbesustainedgiven"full" employment,regardlessofthepricelevel.TheLRPhillipsCurvereflectsthefactthatthe"full" level of employment is dependent on the natural rate of unemployment, which is also independentofthepricelevel.So,insum,theshortruncurvesreflectthefactthattheprice leveldoesfactorintoeconomicdecisionsintheshortrunwhilethelongruncurvesshowthat themostimportantaspectsoftheeconomy,employmentandproduction,areindependentof thepriceleveloverthelongrun.

REFERENCES
SparkNotes: Aggregate Supply: Deriving Aggregate Supply www.scribd.com spot.colorado.edu economicsonlinetutor.com

ASSIGNMENTOFMACROECONOMICS

TOPIC PHILLIPSCURVEANDAGGREGATE SUPPLYCURVE SUBMITTEDTO MISSHUMA SUBMITTEDBY SAHARSHAHBAZ ROLLNO448

MAJARECONOMICS