MAcro CHAPTER 5.2:

The Phillips Curve

CHAPTER SUMMARY

To start this chapter, it is important to note that some economists no longer believe in the Phillips curve. It does not appear to exist very strongly in economic data for the last 20 years or so. Many economists have developed their own, more complex versions of it that take other factors into account. However, it is still part of the AP Macroeconomics curriculum, so...

The Phillips curve shows the relationship between the inflation rate (y-axis) and the unemployment rate (x-axis). When the unemployment rate is high, inflation should be low, as we would be in a recessionary gap. When the unemployment rate is low, inflation should be high, as we would be in an inflationary gap. As a result, the short-run Phillips curve (SRPC) looks like this:

When aggregate demand decreases, the price level decreases (lower inflation) and the Real GDP also decreases (higher unemployment).. This means we move downward along our SRPC, since inflation is falling and unemployment is rising. The exact opposite would occur when aggregate demand increases.

Shifts in aggregate supply can also affect the Phillips curve. When aggregate supply increases, the price level falls (lower inflation) and the Real GDP rises (lower unemployment). When both inflation and unemployment are moving in the same direction, this causes a shift in our SRPC. Since they are both falling, it would shift to the left.

The long-run Phillips curve (LRPC) shows the inflation rate at the natural rate of unemployment. Since it has a fixed unemployment rate, the LRPC is vertical. This means that, in the long run, unemployment will always return to the LRPC, meaning policies intended to change the unemployment rate will only influence inflation.

Just one last reminder - even though this all kind of makes sense, it does not seem to work anymore in actual economies. Economists are currently studying why this was true in the past but does not seem to work as well now. Some argue that it is because inflation is much more stable now. Others argue that it is because markets have become better at anticipating inflation, so changes in inflation rates have less short-term impacts on employer and consumer behavior.

CHAPTER VIDEOS

(Just section 5.2)

CHAPTER READINGS

AP Macroeconomics Unit 5.2 The Philips Curve | FiveableLearn about the Phillips curve in Unit 5 of AP Macroeconomics!

3 Keys to the Phillips Curve Model - AP/IB/College - ReviewEcon.comThe Phillips curve can be tricky unless you fully understand how it applies to the AS/AD model and remember these three things.

CHAPTER PRACTICE

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EXTENSION

Has the Phillips curve disappeared?The Phillips curve prescribes a negative trade-off between inflation and unemployment. Economists have been recently debating on whether the curve has

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