5.2: The Phillips Curve

the phillips curve

shows the trade off between unemployment and inflation

Short run phillips curve (SRPC)

• Inverse relationship

  • downwards slopping

• Overheating economy: low unemployment and high inflation

• Recession: high unemployment and low inflation

Long-Run Phillips Curve (LRPS)

No trade off between inflation & unemployment. Represents the NRU as a vertical line.

When AD shifts

there is a movement along the SRPC

When AS shifts

There is a shift in the SRPC

AD increases

Inflation high

unemployment low

AD decreases

Inflation low

Unemployment high

AS increases

inflation low

unemployment low

AS decreases

inflation high

unemployment high