philip curve

• Phillips curve


  Graph showing the relationship between inflation on the y-axis and unemployment on the x-axis
• In the short run

  There is an inverse or negative relationship between inflation and unemployment
• During a recession


  There is high unemployment but low inflation
• During high inflation


  Unemployment is low
• Short run Phillips curve


  • Downward sloping curve
  • Shows negative output gap or recessionary gap
  • Shows positive output gap
  • Shows full employment
• Long run Phillips curve

  No relationship between inflation and unemployment
• In the long run

  Prices can keep going up but unemployment stays the same
• Increase in consumer spending

  Aggregate demand shifts right, higher price level and less unemployment (positive output gap)
• In the long run


  Prices and wages for resources increase, short run aggregate supply shifts left, back to full employment
• Decrease in exports


  Aggregate demand falls, price level goes down and unemployment goes up (negative output gap)
• In the long run


  Prices and wages for resources fall, short run aggregate supply shifts right, back to full employment
• Whenever the economy self-adjusts, it will be at full employment, making the long run Phillips curve vertical
• Increases/decreases in aggregate demand move along the short run Phillips curve, while shifts in aggregate supply shift the short run Phillips curve
• The Phillips curve was developed in the 1950s and was accurate for a while, but has lost some predictability since the 1970s
• The Phillips curve is still an important tool, even though there are better tools available now