The Phillips Curve — AP Macroeconomics
1. Core Definition and Framework of the Phillips Curve ★★☆☆☆ ⏱ 3 min
The Phillips Curve is a core macroeconomic model describing the relationship between an economy’s inflation rate and unemployment rate. Originally documented by A.W. Phillips and later adapted by Samuelson, Solow, Friedman, and Phelps, it is regularly tested on both multiple-choice and free-response AP Macroeconomics questions.
The standard model places the unemployment rate ($u$) on the horizontal x-axis and the inflation rate ($\pi$) on the vertical y-axis. It is directly linked to the AD-AS model: changes in aggregate demand that move the economy along the short-run aggregate supply (SRAS) curve correspond to movements along the short-run Phillips Curve, while changes that shift SRAS shift the short-run Phillips Curve. The model helps policymakers evaluate short-run tradeoffs from monetary and fiscal policy.
2. Short-Run Phillips Curve (SRPC) ★★★☆☆ ⏱ 4 min
The Short-Run Phillips Curve (SRPC) illustrates the inverse relationship between inflation and unemployment that holds in the short run, when nominal wages and inflation expectations are fixed. This inverse relationship comes directly from the AD-AS model: an increase in aggregate demand raises output and employment (reducing unemployment) while pushing up the price level (increasing inflation), while a decrease in AD has the opposite effect.
\pi = \pi^e - \alpha(u - u_n)
Where $\pi$ = actual inflation rate, $\pi^e$ = expected inflation rate, $u$ = actual unemployment rate, $u_n$ = natural rate of unemployment, and $\alpha$ is a positive constant measuring how responsive inflation is to deviations of unemployment from the natural rate.
Only changes to expected inflation or supply shocks shift the SRPC. An increase in expected inflation or a negative supply shock (e.g., an oil price spike) shifts the SRPC upward/right, leading to higher inflation and higher unemployment at every level of actual unemployment. A decrease in expected inflation or a positive supply shock shifts it downward/left. Changes in aggregate demand only cause movements along a fixed SRPC.
Exam tip: If an AP FRQ asks you to graph the SRPC, always explicitly label the axes to earn the point: unemployment on the horizontal, inflation on the vertical — reversing axes is the most common avoidable mistake on this topic.
3. Long-Run Phillips Curve (LRPC) ★★★☆☆ ⏱ 3 min
The Long-Run Phillips Curve (LRPC) describes the relationship between inflation and unemployment when all prices and expectations have fully adjusted. In the long run, workers and firms update their inflation expectations to match actual inflation, so nominal wages adjust to changes in the price level. This means there is no permanent tradeoff between inflation and unemployment in the long run: unemployment always returns to the natural rate of unemployment ($u_n$) regardless of the long-run inflation rate.
As a result, the LRPC is a vertical line at the natural rate of unemployment. This matches the vertical long-run aggregate supply (LRAS) curve in the AD-AS model: LRAS is vertical at potential output, which corresponds to the natural rate of unemployment, so any shift in LRAS leads to an identical direction shift in LRPC. Only changes to the natural rate of unemployment shift the LRPC: if structural unemployment rises from automation, $u_n$ increases, and LRPC shifts right; if job training reduces frictional unemployment, $u_n$ falls, and LRPC shifts left.
Exam tip: Always remember that the LRPC sits at the same unemployment rate that corresponds to potential output on the AD-AS model. If a question says potential output increases, that means $u_n$ falls, so LRPC shifts left.
4. Distinguishing Movements vs. Shifts of Curves ★★★★☆ ⏱ 3 min
A core AP exam skill is correctly identifying whether a given economic shock causes a movement along the SRPC, a shift of the SRPC, or a shift of the LRPC. Three simple rules apply to all exam problems: (1) Only changes in aggregate demand cause movements along a fixed SRPC; (2) Only changes in expected inflation or supply shocks shift the SRPC; (3) Only changes to the natural rate of unemployment shift the LRPC.
Exam tip: If a problem mentions "stagflation" (higher inflation + higher unemployment), this is always caused by a rightward shift of the SRPC, not a movement along the SRPC from a demand change.
5. AP-Style Concept Check ★★★★☆ ⏱ 2 min
Common Pitfalls
Why: Students confuse the short-run inverse relationship with the long-run adjustment of expectations
Why: Students mix up AD changes (which move along SRAS/SRPC) and SRAS changes (which shift SRAS/SRPC)
Why: Students get used to AD-AS where price is vertical, but mix up variable placement for the Phillips Curve
Why: Students assume any change that shifts SRPC also shifts LRPC
Why: Students confuse demand and supply shocks, assuming all inflation increases come from higher AD
Why: Students match the direction of LRAS shift directly to LRPC without linking output to unemployment