3.3.9 (HL)—Phillips curve and macroeconomic trade-offs

The Phillips curve links inflation and unemployment under stated expectations and supply conditions.

Expectations can shift the curve; supply shocks create stagflation and weaken a simple trade-off.

Identify curve, horizon and shock before evaluating policy.

Anchored expectations can reduce the short-run inflation response to demand.

The curve does not prove causation or guarantee a stable trade-off.

In the short run, a movement along a downward-sloping SRPC can represent AD expansion: unemployment falls while inflation rises. Expected inflation or an adverse supply shock shifts the SRPC upward. The LRPC is vertical at the natural rate of unemployment, so repeatedly raising AD cannot keep unemployment below that rate without accelerating inflation; expectations adjust. Link this to AD/AS: AD shifts can create a temporary output gap, while long-run adjustment returns output to potential. Label inflation vertically and unemployment horizontally on the Phillips diagram.