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Wize University Macroeconomics Textbook > Short Run Tradeoff Between Inflation and Unemployment

The Phillips Curve

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The Phillips Curve

The Phillips Curve is a curve that shows the short-run tradeoff between inflation and unemployment.

Short Run Phillips Curve


Long Run Phillips Curve



  • Natural Rate of Unemployment - not influenced by monetary policy. It is affected by things like minimum wage laws, employment insurance, collective bargaining by unions. It is also called the NAIRU (Non-Accelerating Inflation Rate of Unemployment).

Unemployment Rate=  Natural Rate of Unemployment - a(Actual Inflation - Expected Inflation)\boxed{\text{Unemployment\ Rate} =\ {\ \text{Natural Rate of Unemployment\ - a(Actual Inflation - Expected Inflation)} }}
  • If there's expansionary monetary policy the Aggregate Demand will shift
    right
    causing actual inflation to
    increase
    and unemployment to
    decrease
    which would be a movement along the Phillips curve from point A to point
    B
  • This would lead to
    higher
    expected inflation so the short run Phillips curve will shift
    up
  • The long run Phillips curve remains the same vertical line.
  • Natural-Rate Hypothesis - the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation