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The key problem, however, was primarily that the Phillips curve lacked a distinction between the [[short run]] and [[long run]] timeframes. As the accompanying diagram shows, changes in the structure of the economy (such as those caused by [[exogenous]] supply shocks) shift the short-run Phillips curve either up or down, such that any given level of [[unemployment]] corresponds to a higher or lower [[price level]]. According to this view, the inverse relationship between [[inflation]] and [[unemployment]] still holds, though the precise values of each that correspond to one another at any given short-run [[equilibrium]] may vary when supply side effects are at work.
The key problem, however, was primarily that the Phillips curve lacked a distinction between the [[short run]] and [[long run]] timeframes. As the accompanying diagram shows, changes in the structure of the economy (such as those caused by [[exogenous]] supply shocks) shift the short-run Phillips curve either up or down, such that any given level of [[unemployment]] corresponds to a higher or lower [[price level]]. According to this view, the inverse relationship between [[inflation]] and [[unemployment]] still holds, though the precise values of each that correspond to one another at any given short-run [[equilibrium]] may vary when supply side effects are at work.
The Long-run Phillips curve (LRPC) is drawn as a vertical line at the [[NAIRU]] (the Non-Accelerating Inflation Rate of Unemployment), and exemplifies the idea (adopted primarily by [[neoclassical]] economists) that in the [[long run]], the [[natural rate of unemployment]] will remain constant at the [[NAIRU]], though the corresponding rate of [[inflation]] may change over time.
The Long-Run Phillips curve (LRPC) is drawn as a vertical line at the [[NAIRU]] (the Non-Accelerating Inflation Rate of Unemployment), and exemplifies the idea (adopted primarily by [[neoclassical]] economists) that in the [[long run]], the [[natural rate of unemployment]] will remain constant at the [[NAIRU]], though the corresponding rate of [[inflation]] may change over time.
[[Category:Economics]]
[[Category:Economics]]