What does unemployment above the natural rate look like in Friedman's LRPC?

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bluesun86
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In my textbook, it says "any attempt to reduce unemployment below its natural level is therefore foolhardy and irresponsible. In the short run it leads to accelerating inflation, while in the long run it will eventually create a hyperinflation, which, in the resulting breakdown of economic activity, is likely to increase the natural level of unemployment".

Should I interpret 'hyperinflation' to mean high levels of inflation? If so, how would that look like on a long-run Phillips curve diagram? Since the Phillips curve is downward sloping to the right, I don't see how you can have high inflation and high unemployment both simultaneously, unless it only happens in an extreme scenario (hyperinflation).
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tomftutor
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(Original post by bluesun86)
In my textbook, it says "any attempt to reduce unemployment below its natural level is therefore foolhardy and irresponsible. In the short run it leads to accelerating inflation, while in the long run it will eventually create a hyperinflation, which, in the resulting breakdown of economic activity, is likely to increase the natural level of unemployment".

Should I interpret 'hyperinflation' to mean high levels of inflation? If so, how would that look like on a long-run Phillips curve diagram? Since the Phillips curve is downward sloping to the right, I don't see how you can have high inflation and high unemployment both simultaneously, unless it only happens in an extreme scenario (hyperinflation).
Hyperinflation is very high inflation. It can often mean accelerating inflation as well, though that is not so important here.

Short-run or Standard Phillips Curve

In the downward-sloping (short-run) Phillips curve case, to generate both high unemployment and high inflation, you would need the short-run Phillips curve to shift outwards to the right. This could occur because of increased oil prices for example which could increase business costs, leading to both higher inflation and higher unemployment. The same factors that shift short-run aggregate supply can shift the short-run Phillips curve (see below).

Long-run Phillips Curve

In the Friedman Phillips curve model where there is a downward-sloping short run Phillips curve, there is also a long-run vertical Phillips curve. The long-run vertical Phillips curve means the level of unemployment is not linked to the level of inflation in the long run.

This could mean that in the long run, you could still get high unemployment and high inflation too, if the level of unemployment on the long-run Phillips curve is high. This could be because of high structural unemployment (for example deindustrialisation leaving some workers with skills that are not in demand in the current economy).

How to think about the Short-Run Phillips Curve

If it helps (ignore this if it does not help), one way to think about the how the (short-run) Phillips curve shifts is to think of it like a reflected short-run aggregate supply curve.

The vertical axes are very similar for both (inflation vs price level) but as real GDP goes up, we expect unemployment to go down. So as oil prices go up, SRAS shifts left and the short-run Phillips curve shifts right. This could lead to higher inflation and higher unemployment in the economy.

The diagram shows the effect of an increase in oil prices on the short-run Phillips curve and the SRAS:
Name:  Phillips Curve Diagrams .jpg
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