Monetarists argue that the Long Run AS curve is inelastic and therefore any increase in AD will only lead to inflation in the long run.
However, in the short term, M. Friedman stated there may be a trade-off between unemployment and inflation.
If there is an increase in AD firms will increase wages to encourage more workers to supply their labour. Workers believe they have higher real wages and so are willing to supply more labour.
This increase in the supply of labour leads to an increase in output and therefore there will be a temporary fall in unemployment. Therefore there will be a movement along the SR Phillips curve
However, workers later realise inflation has increased therefore they re-adjust their expectations of inflation, and realise the increase in wages is only a nominal increase. Therefore workers don’t supply more labour and output returns to the Long-run equilibrium of Yf.
· Therefore in the long term output has stated the same but inflation has increased.
· Therefore the Long Run Phillips curve is inelastic because higher inflation has not been accompanied by lower unemployment
· Any reduction in unemployment due to increased AD would only be temporary
· Monetarists argue that Unemployment cannot be altered by AD in the long run. But will remain at its Natural Rate which would be 5%
Rational Expectation Monetarists
They argue that there will be no trade-off even in the short run, because people will readjust their expectations of inflation when AD is increased and so do not supply extra labour)