a. Unemployment in the short run after an increase in inflation: Increase
b. Unemployment in the long run after an increase in inflation: Remain the same
c. Inflation in the short run after a decrease in unemployment: Remain the same
d. Inflation in the long run after a decrease in unemployment: Decrease
The Phillips curve is a concept in economics that represents an inverse relationship between the rate of unemployment and the rate of inflation in an economy. According to this theory:
- a. In the short run, after an increase in inflation, unemployment tends to decrease. This reflects the temporary trade-off between inflation and unemployment observed in the short-run Phillips curve.
- b. However, in the long run, after an increase in inflation, unemployment will remain the same at the natural rate. This is because the long-run Phillips curve is vertical, indicating that the natural rate of unemployment is not affected by inflation in the long run.
- c. In terms of inflation in the short run following a decrease in unemployment, inflation is expected to increase due to the inverse relationship depicted in the short-run Phillips curve.
- d. For inflation in the long run after a decrease in unemployment, inflation will vary depending on other factors, but the natural rate of unemployment will not change because the long-run Phillips curve is vertical and does not reflect a trade-off between inflation and unemployment rates.
The statements from economists, particularly Milton Friedman, have contributed to the understanding that while the trade-off between inflation and unemployment is observed in the short term, in the long run, the unemployment rate is determined by structural factors, not by inflation. Therefore, the long-run Phillips curve is a representation of the natural rate of unemployment consistent with various levels of inflation.