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QUESTION

Short-run Phillips curve is another expression of short-run aggregate supply curve and long run Phillips curve is another expression of long run aggregate supply? Do you agree with this statement. Support your answer with arguments and diagrams?

ANSWER
In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation. While it has been observed that there is a stable short run trade off between unemployment and inflation, this has not been observed in the long run. In the short run, the supply of output depends on the natural rate of output and on the difference between the price level and the expected price level. This relationship is expressed in the aggregate-supply. The Phillips curve is an alternative way to express aggregate supply. It provides a simple way to express the trade off between inflation and unemployment implied by the short-run aggregate supply curve. The Phillips curve posits that inflation depends on the expected inflation rate e, on cyclical unemployment u un, and on supply shocks Both tell us the same information in a different way: both imply a connection between real economic activity and unexpected changes in prices. The SRAS and SR Phillips curves reflect fixed costs (a condition of the economic short run). The SRAS curve shows that production can be increased in the short-run by increasing employment. The short-run Phillips curve shows the effect on the inflation rate of that increase in employment. The LRAS curve reflects the level of output that can be sustained given "full" employment, regardless of the price level. The LR Phillips Curve reflects the fact that the "full" level of employment is dependent on the natural rate of unemployment, which

is also independent of the price level. So, in sum, the short run curves reflect the fact that the price level does factor into economic decisions in the short run while the long run curves show that the most important aspects of the economy, employment and production, are independent of the price level over the long run. If the economy is at equilibrium, then an increase or decrease in output is really an increase or decrease in unemployment, and the two curves are simply a mirror of each other - one is in levels the other is in 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. The Long-Run Phillips Curve The long-run Phillips curve (LRPC) shows the relationship between inflation and unemployment when the economy is at full employment. As illustrated in the figure, the long-run Phillips curve is vertical at the natural unemployment rate. In the long run, higher or lower inflation has no effect on the unemployment rate. This result is analogous to the conclusion from the AS-AD model that in long run, regardless of the price level, real GDP equals potential GDP and the economy is at full employment.

GRAPHICALLY

The Short-Run Phillips Curve illustrates the Trade-off between Inflation and Unemployment that occurs as the AD curve traverses (either up or down) the UPWARD sloping range of SRAS.

CONCLUSION
The SRAS and SR Phillips curves reflect fixed costs (a condition of the economic short run). The SRAS curve shows that production can be increased in the short-run by increasing employment. The short-run Phillips curve shows the effect on the inflation rate of that increase in employment. The LRAS curve reflects the level of output that can be sustained given "full" employment, regardless of the price level. The LR Phillips Curve reflects the fact that the "full" level of employment is dependent on the natural rate of unemployment, which is also independent of the price level. So, in sum, the short run curves reflect the fact that the price level does factor into economic decisions in the short run while the long run curves show that the most important aspects of the economy, employment and production, are independent of the price level over the long run.

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

ASSIGNMENT OF MACRO ECONOMICS

TOPIC PHILLIPS CURVE AND AGGREGATESUPPLY CURVE SUBMITTED TO MISS HUMA SUBMITTED BY SAHAR SHAHBAZ ROLL NO 448 MAJAR ECONOMICS