Overview
This lecture explains the Phillips curve, its short-run and long-run relationships between inflation and unemployment, and connects it to aggregate demand and supply concepts in macroeconomics.
The Phillips Curve: Basics
- The Phillips curve shows the relationship between inflation (y-axis) and unemployment (x-axis).
- In the short run, the Phillips curve is downward sloping, indicating an inverse relationship: higher inflation means lower unemployment, and vice versa.
- A point on the curve can represent a negative output gap (high unemployment, low inflation), positive output gap (low unemployment, high inflation), or full employment.
Short-Run vs. Long-Run Phillips Curve
- The short-run Phillips curve demonstrates movement along the curve when aggregate demand changes.
- In the long run, the Phillips curve is vertical, indicating no trade-off between inflation and unemployment.
- The long-run adjustment means that after resource prices and wages change, the economy returns to full employment regardless of inflation rate.
Connection to Aggregate Demand and Supply
- An increase in aggregate demand shifts the AD curve right, leading to higher output, lower unemployment, and higher prices (positive output gap).
- In the short run, this causes an upward movement along the short-run Phillips curve.
- Over time, resource prices rise, short-run aggregate supply shifts left, and economy returns to full employment (movement to long-run Phillips curve).
- A decrease in aggregate demand leads to lower output, more unemployment, and lower prices (negative output gap), shown as a downward movement along the curve.
- If aggregate supply shifts, it causes the entire short-run Phillips curve to shift.
Key Terms & Definitions
- Phillips Curve — Graph showing the relationship between inflation and unemployment.
- Output Gap — Difference between actual and potential output; positive means above full employment, negative means below.
- Short-Run Phillips Curve — Downward sloping curve showing inverse inflation-unemployment trade-off.
- Long-Run Phillips Curve — Vertical line representing no relationship between inflation and unemployment at full employment.
- Aggregate Demand (AD) — Total demand for goods and services in the economy.
- Aggregate Supply (AS) — Total supply of goods and services available.
- Full Employment — Employment level where all who are willing and able to work can find a job.
Action Items / Next Steps
- Review and be able to draw the Phillips curve with labels for inflation, unemployment, and output gaps.
- Watch the referenced video on key macroeconomic graphs if available.
- Practice pop quiz questions provided in the lecture comments.