Phillip's Curve, Inflation, and Unemployment

What does the Phillips curve describe?

The relationship between inflation and unemployment.

What is the short-run Phillips curve (SRPC)?

A generally downward-sloping relationship between inflation and unemployment.

What is the long-run Phillips curve (LRPC)?

A vertical curve at the natural rate of unemployment.

Is there a permanent long-run inflation-unemployment trade-off?

No. In the standard model, unemployment returns toward its natural rate as expectations adjust.

What is the natural rate of unemployment?

The unemployment rate consistent with normal labor-market conditions, including frictional and structural unemployment.

How can expansionary demand policy affect the SRPC?

It may move the economy along the SRPC toward lower unemployment and higher inflation.

What shifts the SRPC upward?

Higher expected inflation or an adverse supply shock.

What shifts the SRPC downward?

Lower expected inflation or a favorable supply shock.

Why do inflation expectations matter?

They influence wage and price setting, affecting inflation at a given unemployment rate.

What happens after unexpectedly higher inflation?

Unemployment may temporarily fall, but revised expectations can eliminate that temporary effect.