Phillips Curve Explained

1
Phillips Curve Explained
Spring 2008, Chapter 15 (pp. 288 - 295)
2
Phillips Curve

• A.W. Phillips (1957) published a study of the
  relationship between the unemployment rate and
  inflation in England.
• The inflation rate rose with falling
  unemploymentthere was an inverse relationship
  between inflation and unemployment.
• This inverse relationship became known as the
  Phillips Curve.
• The downward-sloping curve suggests a policy
  trade-off between unemployment and inflation.
• SR effects of shifts of AD curve

3
The Short-Run Effect of Changes on Real Output
and the Price Level
AS
P3
Price Level
P2
AD3
P1
AD2
P0
AD1
AD0
0
Q0
Q1
Q2
Q3
Real Domestic Output
4
Phillips Curve, United States, 19611969
5
United States19552000
The relationship seemed to break down when
policymakers attempted to apply it to the U.S.
over the long run. There was no evidence of a
long-run Phillips Curve.
6
Explaining the Phillips Curve with Aggregate
Demand and Supply Curves
7
Short Run to Long Run
Short-Run Aggregate Supply
Long-Run Aggregate Supply
AS1
AS2
ASLR
AS1
a2
a2
b1
AS3
P2
P2
Price Level
Price Level
a1
a1
P1
P1
a3
a3
P3
P3
c1
Qf
Q3
Qf
Q2
Real Domestic Output
Real Domestic Output