Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the Phillips curve model, including:
- what it’s used to illustrate
- key elements of the model
- some examples of questions that can be answered using that model.
What the Phillips curve model illustrates
The Phillips curve illustrates that there is an inverse relationship between unemployment and inflation in the short run, but not the long run. The economy is always operating somewhere on the short-run Phillips curve (SRPC) because the SRPC represents different combinations of inflation and unemployment. Movements along the SRPC correspond to shifts in aggregate demand, while shifts of the entire SRPC correspond to shifts of the SRAS (short-run aggregate supply) curve.
The long-run Phillips curve is vertical at the natural rate of unemployment. Shifts of the long-run Phillips curve occur if there is a change in the natural rate of unemployment.
Key Features of the Phillips curve model
- A vertical axis labeled “inflation rate” or “
” and a horizontal axis labeled “unemployment rate” or “ ”
- A vertical curve labeled LRPC that is vertical at the natural rate of unemployment.
- A downward sloping curve labeled SRPC
Helpful reminders for the Phillips curve model
- Make sure to incorporate any information given in a question into your model. For example, if you are given specific values of unemployment and inflation, use those in your model.
Common uses of the Phillips curve model
Showing a recession
During a recession, the current rate of unemployment (
) is higher than the natural rate of unemployment ( ). Therefore, a point representing a recession in the Phillips curve model (A) will be on the short-run Phillips curve (SRPC) to the right of the long-run Phillips curve (LRPC), as shown in this graph:
Showing adjusting expectations
If the unemployment rate is below the natural rate of unemployment, as it is in point A in the Phillips curve model below, then people come to expect the accompanying higher inflation. As a result of higher expected inflation, the SRPC will shift to the right:
An example of the Phillips curve model in the AP macroeconomics exam
Here is an example of how the Phillips curve model was used in the 2017 AP Macroeconomics exam.
Want to join the conversation?
- Should the Phillips Curve be depicted as straight or concave? Because in some textbooks, the Phillips curve is concave inwards. Does it matter?(13 votes)
- It doesn't matter as long as it is downward sloping, at least at the introductory level. We can leave arguments for how elastic the Short-run Phillips curve is for a more advanced course :)(14 votes)
- For adjusted expectations, it says that a low UR makes people expect higher inflation, which will shift the SRPC to the right, which would also mean the SRAS shifted to the left. Why does expecting higher inflation lower supply?(1 vote)
- Higher inflation will likely pave the way to an expansionary event within the economy. I assume the expectation of higher inflation would lower the supply temporarily, as businesses and firms are WAITING until the economy begins to heal before they begin operating as usual, yet while reducing their current output to save money now.(0 votes)