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The Phillips curve model

Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the Phillips curve model, including:
  1. what it’s used to illustrate
  2. key elements of the model
  3. some examples of questions that can be answered using that model.

What the Phillips curve model illustrates

The Phillips curve illustrates that there is an inverse relationship between unemployment and inflation in the short run, but not the long run. The economy is always operating somewhere on the short-run Phillips curve (SRPC) because the SRPC represents different combinations of inflation and unemployment. Movements along the SRPC correspond to shifts in aggregate demand, while shifts of the entire SRPC correspond to shifts of the SRAS (short-run aggregate supply) curve.
The long-run Phillips curve is vertical at the natural rate of unemployment. Shifts of the long-run Phillips curve occur if there is a change in the natural rate of unemployment.

Key Features of the Phillips curve model

  • A vertical axis labeled “inflation rate” or “start text, i, n, f, end text, point, percent” and a horizontal axis labeled “unemployment rate” or “U, R, percent
  • A vertical curve labeled LRPC that is vertical at the natural rate of unemployment.
  • A downward sloping curve labeled SRPC

Helpful reminders for the Phillips curve model

  • Make sure to incorporate any information given in a question into your model. For example, if you are given specific values of unemployment and inflation, use those in your model.

Common uses of the Phillips curve model

Showing a recession

During a recession, the current rate of unemployment (U, R, start subscript, 1, end subscript) is higher than the natural rate of unemployment (N, R, U). Therefore, a point representing a recession in the Phillips curve model (A) will be on the short-run Phillips curve (SRPC) to the right of the long-run Phillips curve (LRPC), as shown in this graph:

Showing adjusting expectations

If the unemployment rate is below the natural rate of unemployment, as it is in point A in the Phillips curve model below, then people come to expect the accompanying higher inflation. As a result of higher expected inflation, the SRPC will shift to the right:

An example of the Phillips curve model in the AP macroeconomics exam

Here is an example of how the Phillips curve model was used in the 2017 AP Macroeconomics exam.

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