#AP Macroeconomics: Phillips Curve - Your Ultimate Guide 🚀

Hey there, future AP Macro whiz! Let's break down the Phillips Curve, a key concept that links inflation and unemployment. Think of this as your cheat sheet for acing the exam. We'll make sure everything clicks, so you're not just memorizing, but understanding.

#The Phillips Curve: The Big Picture

#What is it?

The Phillips curve is a graph that illustrates the relationship between inflation and unemployment. It's like a mirror reflecting the dynamics of the Aggregate Demand/Aggregate Supply (AD/AS) model. In the short run, there's a trade-off: lower unemployment often means higher inflation, and vice versa.

Key Concept

The Phillips Curve is essentially the AD/AS model in disguise, showing the inverse relationship between inflation and unemployment in the short run.

#Short-Run vs. Long-Run

Short-Run Phillips Curve (SRPC): Shows the inverse relationship between inflation and unemployment. The economy operates somewhere along this curve. Think of it as a temporary balancing act. ⚖️
Long-Run Phillips Curve (LRPC): Vertical line at the natural rate of unemployment. In the long run, there's no trade-off; unemployment stays at its natural rate, regardless of inflation. It's like the economy's long-term equilibrium point. 🎯

Memory Aid

SRPC is a slide: Imagine sliding along the SRPC – lower unemployment, higher inflation; higher unemployment, lower inflation. LRPC is a wall: The LRPC is a vertical wall at the natural rate of unemployment. No matter how much inflation changes, unemployment stays put in the long run.

#Twin Evils and Stagflation

Twin Evils: High inflation and high unemployment. 😫
Stagflation: The dreaded scenario where both inflation and unemployment are high, usually when the economy is in trouble. It's like the worst of both worlds. 🌪️

Practice Question

Multiple Choice Questions:

Which of the following best describes the short-run relationship between inflation and unemployment, as depicted by the Phillips curve? (A) A positive relationship (B) A negative relationship (C) No relationship (D) A proportional relationship (E) A direct relationship
If an economy is experiencing stagflation, which of the following is most likely true? (A) Both inflation and unemployment are low. (B) Inflation is high, and unemployment is low. (C) Inflation is low, and unemployment is high. (D) Both inflation and unemployment are high. (E) The economy is at its natural rate of unemployment.

Free Response Question:

Assume an economy is operating at its natural rate of unemployment. Draw a correctly labeled graph of the short-run and long-run Phillips curves. On your graph, show what happens to the short-run Phillips curve when there is a significant increase in aggregate demand. Explain the short-run effect on inflation and unemployment.

Answer Key:

Multiple Choice:

(B) A negative relationship
(D) Both inflation and unemployment are high.

Free Response Question:

Graph: (2 points) - Correctly labeled SRPC and LRPC, with LRPC as a vertical line at the natural rate of unemployment. - Shift of the SRPC to the right.
Explanation: (3 points) - Increase in aggregate demand shifts the SRPC to the right. - This leads to a movement along the SRPC, resulting in higher inflation. - This leads to a movement along the SRPC, resulting in lower unemployment.

#How Shifts in AD Affect the Phillips Curve

#Decrease in Aggregate Demand (AD)

AD/AS Graph: Equilibrium shifts from point A to point B, causing price level (PL) and real GDP to fall. 📉
Phillips Curve: Movement from point A to point B along the SRPC. Inflation falls, and unemployment rises. It's like the economy is cooling down. 🧊

AD Decrease

#Increase in Aggregate Demand (AD)

AD/AS Graph: Equilibrium shifts from point A to point B, causing the price level (PL) and real GDP to increase. 📈
Phillips Curve: Movement from point A to point B along the SRPC. Inflation rises, and unemployment falls. The economy is heating up. 🔥

AD Increase

Exam Tip

Remember that movements along the SRPC are caused by changes in AD. Think of it as riding the same curve.

#How Shifts in SRAS Affect the Phillips Curve

#SRAS Shifts and SRPC

When the Short-Run Aggregate Supply (SRAS) shifts, the SRPC shifts in the opposite direction. 🔄
SRAS Right (Increase): SRPC shifts left. Inflation and unemployment both fall. This is a good thing! ✅
SRAS Left (Decrease): SRPC shifts right. Inflation and unemployment both rise, leading to stagflation. 😫

#SRAS Increase

SRAS shifts right to SRAS1. ➡️
SRPC shifts left. ⬅️

SRAS Increase

#SRAS Decrease

SRAS shifts left. ⬅️
SRPC shifts right. ➡️

SRAS Decrease

Common Mistake

Students often confuse shifts of the SRPC with movements along the SRPC. Remember: AD changes cause movements along the SRPC, while SRAS changes cause shifts of the SRPC.

Practice Question

Multiple Choice Questions:

An increase in the price of oil, a major input in production, would most likely cause which of the following shifts in the Phillips curve? (A) A shift of the SRPC to the left (B) A shift of the SRPC to the right (C) A movement along the SRPC to the left (D) A movement along the SRPC to the right (E) No shift in the SRPC
If the SRAS curve shifts to the right, what will happen to the SRPC? (A) It will shift to the right (B) It will shift to the left (C) There will be a movement along the curve to the right (D) There will be a movement along the curve to the left (E) There will be no change

Free Response Question:

Assume the economy is initially in long-run equilibrium. Draw a correctly labeled graph of the AD/AS model and the Phillips curve. Show what happens on both graphs if there is a negative supply shock (like a large increase in the cost of energy). Explain the effect on the price level, real GDP, inflation, and unemployment.

Answer Key:

Multiple Choice:

(B) A shift of the SRPC to the right
(B) It will shift to the left

Free Response Question:

Graphs: (4 points) - Correctly labeled AD/AS graph with a leftward shift of the SRAS curve. - Correctly labeled SRPC with a rightward shift of the SRPC.
Explanation: (4 points) - The negative supply shock shifts the SRAS curve to the left, decreasing real GDP and increasing the price level. - This leads to a rightward shift of the SRPC. - This results in higher inflation and higher unemployment (stagflation).

#The Long-Run Phillips Curve (LRPC)

#No Trade-Off in the Long Run

The LRPC is a vertical line at the economy's natural rate of unemployment. 🧍
In the long run, there's no trade-off between inflation and unemployment. Policies to change employment only affect inflation. 🚫
The LRPC corresponds to the economy's full employment level and the Long-Run Aggregate Supply (LRAS). It's like the economy's natural resting point. 🧘

#Changes in the Natural Rate of Unemployment

If the natural rate of unemployment changes, the LRPC shifts. For example, if the natural rate of unemployment increases, the LRPC shifts to the right. ➡️

LRPC

Quick Fact

The LRPC is always vertical and is located at the natural rate of unemployment. This is a key point to remember for the exam.

Practice Question

Multiple Choice Questions:

The long-run Phillips curve is: (A) Horizontal at the natural rate of unemployment (B) Vertical at the natural rate of unemployment (C) Downward sloping, showing a trade-off between inflation and unemployment (D) Upward sloping, showing a positive relationship between inflation and unemployment (E) Always shifting in response to changes in aggregate demand
Which of the following will cause the long-run Phillips curve to shift to the right? (A) A decrease in the natural rate of unemployment (B) An increase in the natural rate of unemployment (C) An increase in aggregate demand (D) A decrease in aggregate demand (E) An increase in the money supply

Free Response Question:

Assume an economy is operating at its natural rate of unemployment. Draw a correctly labeled graph of the long-run Phillips curve. Explain what the long-run Phillips curve implies about the relationship between inflation and unemployment in the long run. What could cause the long-run Phillips curve to shift?

Answer Key:

Multiple Choice:

(B) Vertical at the natural rate of unemployment
(B) An increase in the natural rate of unemployment

Free Response Question:

Graph: (1 point) - Correctly labeled LRPC as a vertical line at the natural rate of unemployment.
Explanation: (2 points) - The LRPC implies that there is no trade-off between inflation and unemployment in the long run. - Changes in aggregate demand will only affect the inflation rate, not the unemployment rate.
Shift: (2 points) - The LRPC can shift due to changes in the natural rate of unemployment (e.g., changes in labor market policies, demographics, or technology).

#Final Exam Focus

#High-Priority Topics

Relationship between AD/AS and Phillips Curve: Understand how shifts in AD and SRAS affect the Phillips curve.
Short-Run vs. Long-Run: Clearly distinguish between the SRPC and LRPC and their implications.
Stagflation: Know what causes it and how it relates to the Phillips curve.
Natural Rate of Unemployment: Understand its significance and how changes in the natural rate shift the LRPC.

#Common Question Types

Graphing: Be prepared to draw and interpret Phillips curve graphs, including shifts and movements.
Scenario Analysis: Analyze how various economic events (e.g., changes in government spending, supply shocks) affect the Phillips curve.
Multiple Choice: Expect questions that test your understanding of the relationship between inflation, unemployment, and the Phillips curve.
Free Response: Be ready to explain the concepts, draw graphs, and analyze scenarios.

#Last-Minute Tips

Time Management: Don't spend too long on any one question. If you're stuck, move on and come back later.
Common Pitfalls: Avoid confusing shifts of the SRPC with movements along the SRPC. Pay attention to the wording of the questions.
Strategies: Start with the questions you know best and work your way up to the more challenging ones. Use graphs to help you visualize the concepts. Always double-check your work.

You've got this! You're now armed with all the knowledge you need to conquer the Phillips Curve. Go get that 5! 💪

The Phillips Curve

Jackson Hernandez

10 min read

Next Topic - Money Growth and Inflation

Listen to this study note

Study Guide Overview

This study guide covers the Phillips Curve, exploring its relationship to inflation and unemployment. It differentiates between the short-run Phillips curve (SRPC) and the long-run Phillips curve (LRPC), including how shifts in aggregate demand (AD) and short-run aggregate supply (SRAS) affect the SRPC. The guide also explains stagflation, the natural rate of unemployment, and its impact on the LRPC. Finally, it provides practice questions and exam tips for the AP Macroeconomics exam.

#AP Macroeconomics: Phillips Curve - Your Ultimate Guide 🚀

#The Phillips Curve: The Big Picture

#What is it?

Key Concept

The Phillips Curve is essentially the AD/AS model in disguise, showing the inverse relationship between inflation and unemployment in the short run.

#Short-Run vs. Long-Run

Short-Run Phillips Curve (SRPC): Shows the inverse relationship between inflation and unemployment. The economy operates somewhere along this curve. Think of it as a temporary balancing act. ⚖️
Long-Run Phillips Curve (LRPC): Vertical line at the natural rate of unemployment. In the long run, there's no trade-off; unemployment stays at its natural rate, regardless of inflation. It's like the economy's long-term equilibrium point. 🎯

Memory Aid

#Twin Evils and Stagflation

Twin Evils: High inflation and high unemployment. 😫
Stagflation: The dreaded scenario where both inflation and unemployment are high, usually when the economy is in trouble. It's like the worst of both worlds. 🌪️

Practice Question

Multiple Choice Questions:

Which of the following best describes the short-run relationship between inflation and unemployment, as depicted by the Phillips curve? (A) A positive relationship (B) A negative relationship (C) No relationship (D) A proportional relationship (E) A direct relationship
If an economy is experiencing stagflation, which of the following is most likely true? (A) Both inflation and unemployment are low. (B) Inflation is high, and unemployment is low. (C) Inflation is low, and unemployment is high. (D) Both inflation and unemployment are high. (E) The economy is at its natural rate of unemployment.

Free Response Question:

Answer Key:

Multiple Choice:

(B) A negative relationship
(D) Both inflation and unemployment are high.

Free Response Question:

Graph: (2 points) - Correctly labeled SRPC and LRPC, with LRPC as a vertical line at the natural rate of unemployment. - Shift of the SRPC to the right.
Explanation: (3 points) - Increase in aggregate demand shifts the SRPC to the right. - This leads to a movement along the SRPC, resulting in higher inflation. - This leads to a movement along the SRPC, resulting in lower unemployment.

#How Shifts in AD Affect the Phillips Curve

#Decrease in Aggregate Demand (AD)

AD/AS Graph: Equilibrium shifts from point A to point B, causing price level (PL) and real GDP to fall. 📉
Phillips Curve: Movement from point A to point B along the SRPC. Inflation falls, and unemployment rises. It's like the economy is cooling down. 🧊

AD Decrease

#Increase in Aggregate Demand (AD)

AD/AS Graph: Equilibrium shifts from point A to point B, causing the price level (PL) and real GDP to increase. 📈
Phillips Curve: Movement from point A to point B along the SRPC. Inflation rises, and unemployment falls. The economy is heating up. 🔥

AD Increase

Exam Tip

Remember that movements along the SRPC are caused by changes in AD. Think of it as riding the same curve.

#How Shifts in SRAS Affect the Phillips Curve

#SRAS Shifts and SRPC

When the Short-Run Aggregate Supply (SRAS) shifts, the SRPC shifts in the opposite direction. 🔄
SRAS Right (Increase): SRPC shifts left. Inflation and unemployment both fall. This is a good thing! ✅
SRAS Left (Decrease): SRPC shifts right. Inflation and unemployment both rise, leading to stagflation. 😫

#SRAS Increase

SRAS shifts right to SRAS1. ➡️
SRPC shifts left. ⬅️

SRAS Increase

#SRAS Decrease

SRAS shifts left. ⬅️
SRPC shifts right. ➡️

SRAS Decrease

Common Mistake

Students often confuse shifts of the SRPC with movements along the SRPC. Remember: AD changes cause movements along the SRPC, while SRAS changes cause shifts of the SRPC.

Practice Question

Multiple Choice Questions:

An increase in the price of oil, a major input in production, would most likely cause which of the following shifts in the Phillips curve? (A) A shift of the SRPC to the left (B) A shift of the SRPC to the right (C) A movement along the SRPC to the left (D) A movement along the SRPC to the right (E) No shift in the SRPC
If the SRAS curve shifts to the right, what will happen to the SRPC? (A) It will shift to the right (B) It will shift to the left (C) There will be a movement along the curve to the right (D) There will be a movement along the curve to the left (E) There will be no change

Free Response Question:

Answer Key:

Multiple Choice:

(B) A shift of the SRPC to the right
(B) It will shift to the left

Free Response Question:

Graphs: (4 points) - Correctly labeled AD/AS graph with a leftward shift of the SRAS curve. - Correctly labeled SRPC with a rightward shift of the SRPC.
Explanation: (4 points) - The negative supply shock shifts the SRAS curve to the left, decreasing real GDP and increasing the price level. - This leads to a rightward shift of the SRPC. - This results in higher inflation and higher unemployment (stagflation).

#The Long-Run Phillips Curve (LRPC)

#No Trade-Off in the Long Run

The LRPC is a vertical line at the economy's natural rate of unemployment. 🧍
In the long run, there's no trade-off between inflation and unemployment. Policies to change employment only affect inflation. 🚫
The LRPC corresponds to the economy's full employment level and the Long-Run Aggregate Supply (LRAS). It's like the economy's natural resting point. 🧘

#Changes in the Natural Rate of Unemployment

If the natural rate of unemployment changes, the LRPC shifts. For example, if the natural rate of unemployment increases, the LRPC shifts to the right. ➡️

LRPC

Quick Fact

The LRPC is always vertical and is located at the natural rate of unemployment. This is a key point to remember for the exam.

Practice Question

Multiple Choice Questions:

The long-run Phillips curve is: (A) Horizontal at the natural rate of unemployment (B) Vertical at the natural rate of unemployment (C) Downward sloping, showing a trade-off between inflation and unemployment (D) Upward sloping, showing a positive relationship between inflation and unemployment (E) Always shifting in response to changes in aggregate demand
Which of the following will cause the long-run Phillips curve to shift to the right? (A) A decrease in the natural rate of unemployment (B) An increase in the natural rate of unemployment (C) An increase in aggregate demand (D) A decrease in aggregate demand (E) An increase in the money supply

Free Response Question:

Answer Key:

Multiple Choice:

(B) Vertical at the natural rate of unemployment
(B) An increase in the natural rate of unemployment

Free Response Question:

Graph: (1 point) - Correctly labeled LRPC as a vertical line at the natural rate of unemployment.
Explanation: (2 points) - The LRPC implies that there is no trade-off between inflation and unemployment in the long run. - Changes in aggregate demand will only affect the inflation rate, not the unemployment rate.
Shift: (2 points) - The LRPC can shift due to changes in the natural rate of unemployment (e.g., changes in labor market policies, demographics, or technology).

#Final Exam Focus

#High-Priority Topics

Relationship between AD/AS and Phillips Curve: Understand how shifts in AD and SRAS affect the Phillips curve.
Short-Run vs. Long-Run: Clearly distinguish between the SRPC and LRPC and their implications.
Stagflation: Know what causes it and how it relates to the Phillips curve.
Natural Rate of Unemployment: Understand its significance and how changes in the natural rate shift the LRPC.

#Common Question Types

Graphing: Be prepared to draw and interpret Phillips curve graphs, including shifts and movements.
Scenario Analysis: Analyze how various economic events (e.g., changes in government spending, supply shocks) affect the Phillips curve.
Multiple Choice: Expect questions that test your understanding of the relationship between inflation, unemployment, and the Phillips curve.
Free Response: Be ready to explain the concepts, draw graphs, and analyze scenarios.

#Last-Minute Tips

Time Management: Don't spend too long on any one question. If you're stuck, move on and come back later.
Common Pitfalls: Avoid confusing shifts of the SRPC with movements along the SRPC. Pay attention to the wording of the questions.
Strategies: Start with the questions you know best and work your way up to the more challenging ones. Use graphs to help you visualize the concepts. Always double-check your work.

You've got this! You're now armed with all the knowledge you need to conquer the Phillips Curve. Go get that 5! 💪

Explore more resources

Flashcard

Continute to Flashcard

Question Bank

Continute to Question Bank

Mock Exam

Continute to Mock Exam

How are we doing?

Give us your feedback and let us know how we can improve

Previous Topic - Fiscal and Monetary Policy Actions in the Short-Run Next Topic - Money Growth and Inflation

Question 1 of 10

Ready to test your knowledge? 🤔 What relationship does the Short-Run Phillips Curve (SRPC) illustrate?

A positive relationship between inflation and unemployment

A negative relationship between inflation and unemployment

No relationship between inflation and unemployment

A direct relationship between inflation and unemployment