What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.

The aggregate supply curve establishes a relation between the price level and real output level. The curve is upward, sloping in the short run and vertical at the potential output level in the long run.

The Philips curve shows a tradeoff relation between inflation and the unemployment rate. The curve is downward sloping in the short run and vertical at the natural unemployment rate in the long run.

The short-run aggregate supply (SRAS) establishes a positive link between the price level and real output level.It shows that as the price level goes up, nominal wages are unchanged or rigid, which causes the firm’s profit to rise, which, in turn, induces them to raise their production.

However, in the long run, real output is independent of changes in the price level.Both price level and nominal wages rise in the long run, which causes the firm’s profit to fall, and they cut back their production. Thus SRAS shifts leftward, which causes a rise in only price level while real output is maintained at its potential level. So, LRAS is vertical.

Similarly, the short-run Philips curve (SRPC) negatively links the inflation rate and unemployment rate. It shows that as the price level goes up, nominal wages are unchanged or rigid, which causes the firm’s profit to rise, forcing them to hire more workers. Thus, the employment level increases and the unemployment rate falls.

However, in the long run, the unemployment rate is independent of changes in the inflation rate. Both price level and nominal wages rise in the long run, which causes the firm’s profit to fall and lay off the workers. Thus SRPC shifts leftward, which causes a rise in only price level while the unemployment rate is maintained at its natural level. So, LRPC is vertical.