Principles of Macroeconomics / Unit 10 MAC 0910 worked example, 60 to 90 seconds
Short Run or Long Run
The idea
Given a claim about inflation and unemployment, say which curve it describes. The test is whether expectations have finished adjusting. If people are still being surprised by the price level, the short-run curve governs and a tradeoff exists. If expectations have caught up and output has returned to potential, the long-run curve governs and no tradeoff remains.
In practice
A claim that demand stimulus lowered unemployment this year while raising inflation describes a movement along the short-run curve; expectations have not caught up. A claim that a decade of higher average inflation left average unemployment unchanged describes the long-run curve; expectations adjusted and output returned to potential. A claim that policy can hold unemployment permanently below the natural rate by accepting steady inflation contradicts the long-run curve, and it is the claim the nineteen seventies tested and broke.
Where people slip
The long-run curve does not say policy is powerless. It says demand policy cannot move unemployment permanently. Moving the natural rate itself is a different instrument, and three entries from now the course takes it up.
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