The Phillips Curve

What Is It?

Phillips Curve - Short Run

Demonstrates the inverse relationship between unemployment and inflation. Changes in Aggregate Demand inversely affect inflation and unemployment rates. This inverse relationship supports the idea that the (Short Run) Phillips curve is downward sloping.

Phillips Curve - Long Run

Demonstrates that, after inflation expectations have been expected for, there is no trade-off between inflation and unemployment. This occurs because in the long run, output will always return to the full employment level, which is equal to the natural rate of unemployment (NRU).

The Phillips Curve In 60 Seconds

The Phillips Curve - 60 Second Adventures in Economics (3/6)

Shifts in the Phillips Curve

Short Run Shift Example:

AD increases and there's no change in AS. This leads to increase in inflation and employment (thus decreasing unemployment). The corresponding movements on the Phillips curve would be up and to the left along the short run curve.

Long Run Shift Example:

The economy is producing at full employment and there's an increase in AD. In the short run this leads to increased inflation and employment (as mentioned above). Because of this, over time, workers will begin to demand higher nominal wages. This requires firms to reduce employment and raise prices (a leftward shift of the SRAS). Though, with the passage of time, output (and unemployment) will return to its full employment level with inflation being higher than before. This represents the only shift in LRPC, as unemployment will always go back to its natural rate.