How do you reconcile the vertical long run Phillips curve with the downward sloping short run Phillips curve? Explain with the help of a diagram.

**Reconciling the Vertical Long-Run Phillips Curve with the Downward Sloping Short-Run Phillips Curve**

The Phillips Curve represents the relationship between inflation and unemployment. In the short run, it is typically downward sloping, indicating an inverse relationship between inflation and unemployment. However, in the long run, the Phillips Curve is vertical, suggesting no trade-off between inflation and unemployment.

**1. Short-Run Phillips Curve**

– **Inverse Relationship**: In the short run, lower unemployment can be associated with higher inflation, and vice versa. This is because increased demand for goods and services can lead to higher employment and wages, which in turn can lead to higher prices (inflation).

– **Expectations Not Fully Adjusted**: In the short run, inflation expectations may not fully adjust, allowing monetary and fiscal policies to influence real output and employment.

**2. Long-Run Phillips Curve**

– **Vertical at Natural Rate of Unemployment**: In the long run, the Phillips Curve is vertical at the natural rate of unemployment, where the economy is at its full employment level. Here, inflation has no long-term effect on unemployment.

– **Expectations Fully Adjusted**: In the long run, inflation expectations adjust to actual inflation. Any attempt to reduce unemployment below its natural rate only leads to higher inflation without reducing unemployment in the long term.

**3. Reconciliation of Short-Run and Long-Run Curves**

– **Adaptive Expectations**: The reconciliation between the two curves lies in the concept of adaptive expectations. In the short run, people base their expectations of future inflation on past inflation rates. Over time, as people adjust their expectations, the short-run Phillips Curve shifts.

– **Diagram Explanation**: In a diagram with inflation on the vertical axis and unemployment on the horizontal axis, the short-run Phillips Curve is downward sloping. The long-run Phillips Curve is a vertical line at the natural rate of unemployment. As expectations adjust, the short-run curve shifts upwards (with higher inflation at each unemployment level) until it aligns with the long-run curve.


**Conclusion**

The short-run Phillips Curve suggests a trade-off between inflation and unemployment due to unadjusted expectations and the impact of fiscal and monetary policies. However, in the long run, as expectations adjust, this trade-off disappears, and the Phillips Curve becomes vertical. This reconciliation highlights the limitations of using inflationary policies for long-term unemployment reduction.