The Phillips Curve
Jackson Hernandez
10 min read
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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 🚀
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.
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. 🎯
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:
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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
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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-ru...
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