Describe the short run trade-off between inflation and unemployment. Why is there not a long-run trade-off? How long do you think the short-run lasts? (Or do you believe there is a trade-off at all – many economists don’t. Why?
There is a temporary short run trade-off between inflation and unemployment. The Phillips curve suggests that in the short-run, inflation and unemployment are inversely related; as one increases the other decreases. It is believed that unanticipated inflation, or rising rate of inflation, may reduce unemployment. Based on our text, I believe a short-run trade off between inflation lasts 2-5 years. There is no long-run trade-off between inflation and unemployment because of the classical theory of economics. It is believed that growth in the money supply is the primary determinant of inflation. In addition, monetary growth does not affect real variable such as output and employment; it alters all prices and nominal incomes proportionately. Specifically, monetary growth does not influence those factor that determine unemployment rate.
I do believe there is a trade-off at all between unemployment and inflation, but as said above only in the short term because the actions taken by the central bank pushes these to items in different directions.
Principles of Macroeconomics Spring 2020 