1. The Phillips Curve
AP Macroeconomics

2. Expansionary Monetary Policy
Money Market
Loanable Funds Market
Expansionary Monetary Policy

3. Contractionary Monetary Policy
Money Market
Loanable Funds Market
Contractionary Monetary Policy

4. Expansionary Fiscal Policy
Loanable Funds Market
Money Market
Expansionary Fiscal Policy

5. Contractionary Fiscal Policy
Loanable Funds Market
Money Market
Contractionary Fiscal Policy

6. Inflation, deflation, disinflation
Demand-pull inflation
Cost-push inflation
Inflation, deflation, disinflation

7. The Phillips Curve
1958 A.W. Phillips published the results of his research on the historical relationship between the unemployment rate (u%) and the rate of inflation (π%) in Great Britain.
His research indicated a stable inverse relationship between the u% and the π%.
As u%↓, π%↑ ; and as u%↑, π%↓.
Implication: policy makers could exploit the trade-off and reduce u% at the cost of increased π%.
Used as a rationale for the Keynesian aggregate demand policies of the mid-20th century.

8. The Phillips Curve (hypothetical example)π% . . . 4% . . . 2% . PC 5% 7% u%
Note: Inflation expectations are held constant

9. AD1 5%
AD2 1% 3%

10. Relating Phillips Curve to AS/AD
An easy way to understand how changes in the AS/AD model affect the Phillips Curve is to think of the two sets of graphs as mirror images.
NOTE: The 2 models are not equivalent. The AS/AD model is static, but the Phillips Curve includes change over time. Whereas AS/AD shows one time changes in the price-level as inflation or deflation, the Phillips Curve illustrates continuous change in the price-level as either increased inflation or disinflation.

11. Increase AD = ↑/← along SRPCPL π%
LRAS . .
SRAS
SRPC  . . P1
π 1    P π
AD1 AD   Y YF
GDPR un u u%
C↑, IG↑, G↑ and/or XN↑
.: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ .: up/left along SRPC

12. Decrease AD = ↓/→along SRPCPL
LRAS π% .
SRAS
SRPC .  . . P π    P1 π1 AD
AD1   YF Y
GDPR u un u%
C↓, IG↓, G↓ and/or XN↓
.: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ .: down/right along SRPC

13. Trouble for the Phillips Curve
1970’s the United States experienced concurrent high u% & π%, stagflation.
1976 American Nobel Prize economist Milton Friedman saw stagflation as disproof of the stable Phillips Curve.
Natural u% was independent of the π%.
This independent relationship is called the Long-Run Phillips Curve.

14. Trouble for the Phillips Curveπ% . . . . . . . . . . 4% . . . 2% . . PC 5% 7% u%

15. Trouble for the Phillips Curveπ%
LRPC . . . . . . . . . 4% . . . 2% . . 5%
un% 7% u%

17. The Long-Run Phillips Curveπ%
LRPC
un% u%
Note: Natural rate of unemployment is held constant

18. Long-Run Phillips Curve (LRPC)
Because the Long-Run Phillips Curve exists at the natural rate of unemployment (un), structural changes in the economy that affect un will also cause the LRPC to shift.
Increases in un will shift LRPC 
Decreases in un will shift LRPC 

19. Short-Run Phillips Curve (SRPC)
Today many economists reject the concept of a stable Phillips curve, but accept that there may be a short-term trade-off between u% & π% given stable inflation expectations.
Most believe that in the long-run u% & π% are independent at the NRU.
Modern analysis shows that the SRPC may shift left or right.
The key to understanding shifts in the Phillips curve is inflationary expectations!

20. The Short-Run Phillips Curve (SRPC)π% . . . . . . . . . . 4% . . . 2% .
SRPC 5% 7% u%

21. The Short-Run Phillips Curve (SRPC)π% . . . . . . . . . . 4% . . .
SRPC1 2% .
SRPC 5% 7% u%

22. .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓ .: SRPC  (Disinflation)
SRAS  = SRPC 
SRAS
SRPC PL π%
LRPC
LRAS . .
SRAS1
SRPC1   . . P π   P1 π1 AD   Y YF
GDPR un u u%
Inflationary Expectations↓, Input Prices↓, Productivity↑, Business Taxes↓, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓ .: SRPC  (Disinflation)

23. .: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑ .: SRPC  (Stagflation)
SRAS  = SRPC 
SRAS1
SRPC1 π% PL
LRAS
LRPC
SRAS
SRPC . .   . . P1
π 1   P π AD   Y1 YF
GDPR un u1 u%
Inflationary Expectations↑, Input Prices↑, Productivity↓, Business Taxes↑, and/or Increased Regulation
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑ .: SRPC  (Stagflation)

25. Summary
There is a short-run trade off between u% & π% the short-run Phillips Curve (SRPC)
In the long-run, no trade-off exists between u% & π%. Long-run Phillips Curve (LRPC)
LRPC exists at the natural rate of unemployment (un).
un ↑ .: LRPC 
un ↓ .: LRPC 
ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD = Δ along SRPC
AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ .: up/left along SRPC
AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ .: down/right along SRPC
Δ Inflationary Expectations, Δ Input Prices, Δ Productivity, Δ Business Taxes and/or Δ Regulation = Δ SRAS = Δ SRPC
SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓ .: SRPC 
SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑.: SRPC 