Phillips Curve

relationship between unemployment and inflation.
Initial theory: inverse relationship between inflation and unemployment.
Economic growth leads to inflation, resulting in more jobs and less unemployment.
Model assumes economic growth is driven by increases in Aggregate Demand (AD).

Simplistic relationship between unemployment and inflation was disproved in the 1970s due to stagflation.
Caused by the increase in the cost of production derived from the OPEC Petrol Crisis.

In the long run, there is no trade-off between inflation and unemployment.
People adapt their expectations, and the trade-off disappears.
Inflation and unemployment are unrelated in the long run because people can plan and adapt.
LRPC is vertical at the natural rate of unemployment.
The natural rate of unemployment is where the actual rate of inflation equals the expected rate of inflation.
The economy moves towards this equilibrium rate in the long run.

Shifts in the SRAS correspond to shifts in the SRPC (inversely).
Example: SRAS moves outwards, SRPC shifts, unemployment decreases, and inflation initially stays the same.