The inflation-unemployment tradeoff, real in the short run, gone in the long run.
Warming up the engine…
The short-run trade-off between inflation and unemployment: when unemployment falls below its natural rate, inflation tends to rise, and expectations shift the whole relationship.
π = πe − β(u − u*) + supply shocks
Tight labour markets bid up wages and then prices. But workers learn: once people EXPECT higher inflation, the curve shifts up and the same unemployment rate comes with more inflation. That is why the trade-off exists in the short run and vanishes in the long run, where the curve is vertical at the natural rate.
Distinguish a movement ALONG the curve (demand shock) from a SHIFT of the curve (changed expectations or supply shock). The 1970s stagflation is the standard evidence for the shifting curve.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Equilibrium at u 5.0, π 3.0.
Equilibrium: u* = 5.0, π* = 3.0
Current equations
The tradeoff every policymaker wishes were permanent. In the short run, pushing unemployment below normal comes with higher inflationinflationA sustained rise in the overall price level, eroding money's purchasing power., you slide along the downward SRPC. But the vertical long-run curve says: no such menu exists permanently. Unemployment returns to its natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle.; only inflation stays.
Source: Blanchard, Macroeconomics, ch. 8