Philips Curve

Phillips Curve

Shows an inverse relationship between inflation and unemployment in the short run.

Short-Run Phillips Curve (SRPC)

Downward sloping curve indicating that high inflation is associated with low unemployment and vice versa.

Total demand for goods and services within the economy that influences the movements along the SRPC.

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Supply Shocks

Events that cause a sudden increase or decrease in the supply of a product, affecting the SRPC's position.

Natural Rate of Unemployment

The level of unemployment when the economy is at full potential, influenced by frictional and structural unemployment.

Long-Run Phillips Curve (LRPC)

Vertical curve indicating no trade-off between inflation and unemployment; always returns to the natural rate of unemployment.

Trade-off between inflation and unemployment

Exists only in the short run; in the long run, this trade-off disappears.

Stagflation

A situation where unemployment rises alongside inflation, typically following a negative supply shock.

Negative Supply Shock Example

An event, like an oil crisis, that shifts the SRPC to the right causing higher unemployment and inflation.

Positive Supply Shock Example

An event that shifts the SRPC to the left, resulting in lower unemployment and inflation.