1. The Phillips Curve

2. Short Run Phillips Curve
Named for A.W. Phillips, the guy who came up with it.
Suggests an inverse relationship between inflation and unemployment.
When inflation goes up, unemployment goes down,
Can be graphed showing inflation rate on y axis and unemployment rate on x axis

3. Short Run Phillips Curve
Using this data from the , the year first addressed by Phillips, draw a correctly labeled Phillips curve. Pay attention to labeling the axes.
Unemployment rate (%) Inflation rate (%)

4. Short Run Phillips Curve
When drawing the short-run Phillips curve, the the expected inflation rate and the natural unemployment rate are held constant .
For example, we would expect a 2% inflation and 6% unemployment as the natural rate (which means full employment).

5. Phillips Curve Ch 15, pages 291
Named for A.W. Phillips who came up with the idea in the 1970s
Shows the relationship between the unemployment rate and the inflation rate
Suggests the relationship is inverse: when one goes up the other goes down
Lower inflation rates are associated with higher unemployment rates

6. Short Run Phillips Curve
Point A is the expected inflation rate-natural unemployment rate.
An unanticipated increase in aggregate demand makes unemployment decreases and inflation increases—movement to point A2.
These points can also be seen in the AD/AS model
Inflation rate (%) A2 A Pe A3
SRPC UN
Unemployment rate (%)

7. Short Run Phillips Curve
AD and AS intersect at full employment
Suppose AD is expected to increase.
AD shifts to AD1
Wages and input prices adjust, SRAS shifts to SRAS1.
Point A in the Phillips curve and the AS/AD PL
LRAS
SRAS1
SRAS A2 A A3
AD2
AD1 AD
RGDP

8. Short Run Phillips Curve
Assume AD increase again.
People thought Ad would move to AD1, but it moves to AD2.
Economy moves to point A2 in both graphs.
Unemployment is below natural rate and inflation is above expected rate. PL
LRAS
SRAS1
SRAS A2 A A3
AD2
AD1 AD
RGDP

9. Short Run Phillips Curve
If policy makers try to keep unemployment rate at the level of A2, people will come to expect the inflation rate associated with A2.
As a result the short run Phillips curve will shift upward and/or outward until the inflation rate associated with A2 is at the natural unemployment rate. PL
LRAS
SRAS1
SRAS A2 A A3
AD2
AD1 AD
RGDP

10. Short Run Phillips Curve
What will happen if people expect the AD curve to increase and adjust their wages accordingly but in reality AD does not increase?
The economy will move to point A3
The SRPC is drawn with an expected inflation rate and specific natural rate of unemployment.
The SRPC will shift upward if expected inflation increases
SRPC will shift leftward if natural rate of unemployment decreases. PL
LRAS
SRAS1
SRAS A2 A A3
AD2
AD1 AD
RGDP

11. Long Run Phillips curve