The Short-Run Phillips Curve

The Phillips Curve

The Phillips Curve suggests that there is a tradeoff for policymakers between unemployment and inflation (i.e. both can't be low), based on observations made by economist A.W. Phillips in the 1950s.

Short-run Phillips curve (SRPC)

The theory is that if unemployment went down, there would be an increase in inflationary pressure. And if unemployment went up, inflationary pressure would fall.
If unemployment is high, there is lots of competition for vacancies and jobs. Firms can keep wages low and there is low cost-push inflationary pressure.
If unemployment is low, the labor market is 'tight'. Firms need to offer much higher wages to get workers to come for them and existing workers have more power.

Policy implications

The SRPC has policy implications, arguing that a government can aim for low unemployment or low inflation, but not both.

Stagflation

This is an increase in both unemployment and inflation.
A shift in the Phillips curve is caused by supply shocks and changes in inflationary expectations.
Over long periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher.

Examples of stagflation

The U.S. economy experienced the pattern of higher unemployment and inflation in the deep recession from 1973 to 1975, and again in back-to-back recessions from 1980 to 1982.
Economists have concluded that two factors cause the Phillips curve to shift. The first is supply shocks, like the mid-1970s oil crisis. The second is changes in people’s expectations about inflation. In other words, there may be a tradeoff between inflation and unemployment when people expect no inflation, but when they realize inflation is occurring, the tradeoff disappears.

When does the SRPC hold?

We should interpret a downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher (as in the 1970s and early 1980s) or both lower (as in the early 1990s or first decade of the 2000s).

1Microeconomics

1.1Competitive Markets: Demand & Suply

1.1.1Markets & Demand

1.1.2Diminishing Marginal Returns

1.1.3Supply

1.1.4Market Equilibrium

1.1.5Price Mechanism

1.1.6Consumer & Producer Surplus

1.1.7IB Multiple Choice - Demand

1.1.8IB Multiple Choice - Supply

1.2Elasticity

1.2.1Elasticities of Demand

1.2.2Factors Affecting Price Elasticity of Demand

1.2.3Elasticity of Supply

1.2.4Price Elasticity of Supply

1.2.5IB Multiple Choice - Price Elasticity of Demand

1.2.6IB Multiple Choice - Price Elasticity of Supply

1.2.7IB Multiple Choice - Other Elasticities

1.3Government Intervention

1.3.1Indirect Taxes & Subsidies

1.3.2Application Question - Taxing Prices or Quantities

1.3.3Subsidies & Price Controls

1.3.4Deadweight Loss & Government Intervention

1.3.5Elasticity & Tax Incidence

1.3.6IB Multiple Choice - Government Intervention

1.4Market Failure

1.4.1Types of Market Failure

1.4.2Introduction to Externalities

1.4.3Negative Externalities

1.4.4Policy for Negative Externalities

1.4.5Positive Externalities

1.4.6The Deadweight Welfare Loss of Externalities

1.4.7Case Study - The Externalities of Education

1.4.8Public Goods & the Free-Rider Problem

1.4.9Asymmetric Information

1.4.10End of Topic Test - Market Failure

1.4.11Application Questions - Market Failure

1.5HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2Macroeconomics

2.1The Level of Overall Economic Activity

2.1.1The Circular Flow of Income

2.1.2Defining GDP

2.1.3Limitations of GDP

2.1.4IB Multiple Choice - Economic Indicators

2.1.5Business Cycles

2.1.6Output Gaps

2.2Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve

2.2.2Components of Aggregate Demand

2.2.3Shape of the Aggregate Demand Curve

2.2.4Shifts in Aggregate Demand

2.2.5IB Multiple Choice - Aggregate Demand

2.2.6Short & Long-Run Aggregate Supply

2.2.7Alternative Models of LRAS

2.2.8Equilibrium in the AD-AS Model

2.2.9Output Gaps & the AD-AS Model

2.3Macroeconomic Objectives

2.3.1Introduction to Unemployment

2.3.2Limitations of Unemployment

2.3.3Types of Unemployment

2.3.4Causes & Impact of Unemployment

2.3.5Defining Inflation

2.3.6Measuring Inflation

2.3.7Use of Index Numbers

2.3.8The Consumer Price Index

2.3.9Consequences of Inflation

2.3.10Causes of Inflation

2.3.11Inflation & Unemployment Tradeoff

2.3.12The Short-Run Phillips Curve

2.3.13The Long-Run Phillips Curve

2.4Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth

2.4.2Determinants of Productivity

2.4.3Economic Growth & Productivity

2.4.4Absolute & Relative Poverty

2.4.5Inequality

2.4.6Inequality 2

2.4.7Lorenz Curve

2.4.8Government Policy on Poverty

2.4.9End of Topic Test - Poverty & Inequality

2.4.10Application - Inequality & Poverty

2.5Fiscal Policy

2.5.1Introduction to Fiscal Policy

2.5.2Fiscal Policy and AD-AS Model

2.5.3Fiscal Policy Lags

2.5.4Automatic Stabilizers

2.5.5IB Multiple Choice - Fiscal Policy

2.6Monetary Policy

2.6.1Objectives of Monetary Policy

2.6.2Monetary Policy Implementation

2.6.3Monetary Policy & AD-AS Model

2.6.4Monetary Policy Lags & Pitfalls

2.7Supply-Side Policies

2.7.1Supply-Side Policies

2.7.2Supply-Side Policies 2

3The Global Economy

3.1International Trade

3.1.1Globalisation

3.1.2Globalisation for LEDCs

3.1.3Globalisation for MEDCs

3.1.4Comparative Advantage & Trade

3.1.5Protectionism

3.1.6Arguments for Protectionism

3.1.7Arguments Against Protectionism

3.1.8End of Topic Test - Globalisation & Trade

3.1.9Case Study - Globalisation & Trade

3.2Exchange Rates

3.2.1Floating Exchange Rates

3.2.2Fixed Exchange Rate

3.2.3Effect of a Stronger & Weaker Dollar

3.3The Balance of Payments

3.3.1Balance of Payments

3.3.2Balance of Payments 2

3.3.3FDI & Reducing a BoP Deficit

3.4Economic Integration

3.4.1Customs Unions & WTO

3.4.2Merged Currency

3.5Terms of Trade

3.5.1Absolute & Comparative Advantage

3.5.2Gains from Trade

3.5.3Terms of Trade

3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6Economic Development

3.6.1Factors Influencing Growth & Development

3.6.2International Institutions

3.6.3Measures of Development

3.6.4Barriers to Development

3.6.5Case Study - The Bottom Billion

3.6.6End of Topic Test - Emerging & Developing

3.7The Role of Domestic & International Factors

3.7.1Interventionist Strategies

3.7.2Development Strategies

3.7.3Development Promotion Policies

3.7.4End of Topic Test - Growth & Global Development

3.7.5Application Questions -Growth & Global Development

3.8The Role of International Trade

3.8.1International Institutions

3.8.2End of Topic Test - Globalisation & Trade

3.9The Role of Foreign Aid

3.9.1Aid

3.9.2Limitations of Aid

3.9.3Support for Aid

3.9.4Application Questions - Developing Countries

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