Short and long run Phillips curve

Short run Phillips curve: it represents a trade off between the level of inflation and the level of unemployment in the economy. Any change in the AD curve will produce a negative relationship between the inflation rate and unemployment rate.

For example, an expansionary demand side policy will decrease the level of unemployment but increase the inflation rate (in the short run) and vice versa.

The inverse relationship between inflation and unemployment implies that the Phillips curve is downward slopping.

It also shows that deflation is related to high unemployment, think about the AD curve shifting to the left.

A shift in AD is just a movement along the Phillips curve.

When the SRAS shifts, the Phillips curve shifts in the opposite direction.

Long run Phillips curve: the curve is inelastic, implying that there is no trade off between inflation and employment.

Shift in SRAS to the right, the AD curve will shift to the left to reach, once again, LRAS. The impact on the short run Phillips curve will be: the curve firsts shifts to the left, and then there is a downward movement along the curve.

From the example above, we see that in the long run, the change in inflation does not impact the natural rate of unemployment.

A shift in the LRAS curve will cause the long run Phillips curve to move in the opposite direction.

Reference: Welker, Jason. AP Maroeconomics Crash Course. Research & Education Association (2014). p 209-220.

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