Macroeconomics: Phillips Curve
The trade-off between Inflation and Unemployment
What the Phillips Curve?
The Phillips Curve is a graph that shows the inverse relationship between inflation and unemployment. When unemployment rises, the inflation will decrease, and vice-versa. The curve shows the relationship in the short run, but in the long run the economy is expected to reach full employment (3-4% unemployment) thus represented by a vertical line as seen below. When unemployment falls below that vertical line, inflation rises rapidly.
When drawing a Phillips curve, follow these steps:
1. Draw the AD/AS graph of the economic situation
2. Draw your x and y axis along with the labels or your Phillips curve parallel to the AD/AS graph
3. The short run curve in the Phillips curve is the inverse of the SRAS on the AD/AS graph; so draw the reflection of the SRAS curve in the Phillips curve graph... TA DA!
4. Finally, draw you vertical long run line on the Phillips curve graph exactly where the LRAS is placed on the AD/AS graph
No matter where the SRAS or LRAS shift on the AD/AS graph, you can always draw the Phillips curve that corresponds!!