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AP® Macroeconomics · Unit 5 · Topic 5.2

The Phillips Curve: Revision Notes (Macroeconomics 5.2)

One-page recap of the short-run and long-run Phillips curves, gaps on the graph, demand and supply shocks, LRPC shifts and the graphing mistakes that cost marks.

Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.

Recap

  • Axes: inflation rate (vertical), unemployment rate (horizontal).
  • SRPC: downward-sloping. The short-run trade-off: lower unemployment comes with higher inflation. The economy is always on its current SRPC.
  • LRPC: vertical at the natural rate of unemployment. No long-run trade-off.
  • Long-run equilibrium: where the SRPC crosses the LRPC.
  • Left of the LRPC (unemployment below the natural rate): inflationary gap. Right of the LRPC: recessionary gap.

Key relationships

Event AD–AS model Phillips curve model
AD increases AD right Move up-left along the SRPC
AD decreases AD left Move down-right along the SRPC
Adverse supply shock SRAS left SRPC right (stagflation)
Favourable supply shock SRAS right SRPC left
Long-run adjustment after AD rises SRAS left SRPC right; back to LRPC at higher inflation
Natural rate falls LRAS right LRPC left
Natural rate rises LRAS left LRPC right

Assumptions

  • The SRPC is drawn for given expected inflation and given input prices; when they change, the SRPC shifts.
  • In the long run wages and prices adjust fully, so unemployment returns to the natural rate.
  • Temporary supply shocks shift the SRPC but not the LRPC.

Mistakes to avoid

  1. Shifting the SRPC for a demand shock. It is a movement along the curve.
  2. Moving the SRPC the same way as SRAS. They move in opposite directions.
  3. Drawing the LRPC at zero unemployment instead of the natural rate.
  4. Calling a point left of the LRPC “recessionary”.
  5. Swapping the axes or leaving them unlabelled (label both as percentages).
  6. Forgetting that in the long run after a demand rise, inflation ends higher than it started.

Quick self-check

  1. Valdoria’s natural rate is 4.5% and unemployment is 3.8%. Which side of the LRPC is the economy on, and what kind of gap is it? (Left; inflationary gap)
  2. A government spending cut lowers AD. What happens on the Phillips curve graph in the short run? (Move down and to the right along the SRPC)
  3. A sharp fall in imported energy prices. Which curve moves, and which way? (SRPC shifts left)
  4. Better job-matching cuts frictional unemployment. Which curve moves? (LRPC shifts left)

Next: practice questions.

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