The Phillips curve shows the trade-off between inflation and unemployment. Move the sliders or pick a scenario below, and watch the AD–AS graph and the Phillips curve change together. Every AP question on this topic comes back to how those two graphs line up.
Dashed grey lines show where the economy started (5% unemployment, 3% inflation). Solid lines show where it is now.
Slopes downward. In the short run, lower unemployment comes with higher inflation, and higher unemployment with lower inflation. It mirrors the upward-sloping SRAS curve.
Vertical at the natural rate of unemployment. In the long run there is no trade-off: inflation can be any level, but unemployment returns to the natural rate. It mirrors the vertical LRAS curve.
Frictional plus structural unemployment, with zero cyclical unemployment. At the natural rate, real GDP equals full-employment output.
The SRPC crosses the LRPC at the expected inflation rate. When people expect more inflation, they demand higher wages, SRAS shifts left, and the SRPC shifts right.
A negative supply shock raises unemployment and inflation at the same time. On the graph, the whole SRPC shifts right (up). This is why the trade-off broke down in the 1970s.
Disinflation means inflation is falling but still positive (5% to 2%). Deflation means the price level itself is falling (inflation below 0%).
Memorize this table. Most multiple-choice questions on the Phillips curve are one row of it.
| Event | On the AD–AS graph | On the Phillips curve |
|---|---|---|
| Expansionary fiscal or monetary policy | AD shifts right, P↑ and Y↑ | Move up and left along the SRPC |
| Contractionary policy, falling confidence | AD shifts left, P↓ and Y↓ | Move down and right along the SRPC |
| Negative supply shock, higher expected inflation, higher wages | SRAS shifts left | SRPC shifts right |
| Positive supply shock, lower expected inflation | SRAS shifts right | SRPC shifts left |
| More capital or better technology | LRAS shifts right | LRPC does not move unless the natural rate changes |
| Better job matching, less structural unemployment | LRAS shifts right | LRPC shifts left (natural rate falls) |
| More structural unemployment | LRAS shifts left | LRPC shifts right (natural rate rises) |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 5.2. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 5 terminology guide.