What is the short-run trade-off between unemployment and inflation, and why does it vanish in the long run?
Topic 5.2 The Phillips Curve: explain the short-run trade-off between inflation and unemployment, the vertical long-run Phillips curve at the natural rate, and how the curves shift.
A focused answer to AP Macroeconomics Topic 5.2, covering the short-run Phillips curve and its trade-off, the vertical long-run Phillips curve at the natural rate of unemployment, the link to the AD-AS model, and how supply shocks and expectations shift the curve, with a worked graphing question.
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What this topic is asking
Topic 5.2 is the Phillips curve, which shows the relationship between inflation and unemployment. The College Board wants you to explain the short-run trade-off, the vertical long-run Phillips curve at the natural rate, how the two link to the AD-AS model, and what shifts the curves. The Phillips curve mirrors AD-AS in inflation-unemployment space.
The short-run Phillips curve
The SRPC is just the AD-AS model in different axes:
The long-run Phillips curve
So expansionary policy can push unemployment below the natural rate only temporarily; in the long run unemployment returns to the natural rate, leaving only higher inflation.
What shifts the curves
Try this
Q1. Why is the long-run Phillips curve vertical? [2 points]
- Cue. In the long run unemployment returns to the natural rate whatever the inflation rate, so there is no permanent trade-off.
Q2. A negative supply shock occurs. Which way does the short-run Phillips curve shift, and what happens to inflation and unemployment? [2 points]
- Cue. The SRPC shifts right (outward); inflation and unemployment both rise (stagflation).
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2019 (style)1 marksMultiple choice. The long-run Phillips curve is vertical at the natural rate of unemployment because, in the long run, (A) inflation and unemployment always rise together. (B) there is no trade-off; unemployment returns to its natural rate regardless of the inflation rate. (C) the central bank controls unemployment. (D) wages are sticky. (E) inflation is always zero.Show worked answer →
The answer is (B). In the long run the economy returns to full employment (the natural rate of unemployment) whatever the inflation rate, so there is no permanent trade-off. The long-run Phillips curve is therefore vertical at the natural rate, the mirror image of the vertical LRAS.
(A) is false. (C) overstates central bank power over real variables. (D) explains the short-run curve, not the long run. (E) is false. The no-trade-off result gives (B).
AP 2021 (style)5 marksFree response. (a) Draw a correctly labelled graph of the short-run and long-run Phillips curves, marking the natural rate of unemployment. (b) Expansionary policy moves the economy up the short-run Phillips curve. Show this and state what happens to inflation and unemployment in the short run. (c) State where the economy ends up in the long run. (d) A negative supply shock occurs. Show its effect on the short-run Phillips curve. (e) State what happens to inflation and unemployment after the supply shock.Show worked answer →
A 5-point graphing FRQ.
(a) Graph (1 point): vertical axis inflation rate, horizontal axis unemployment rate; downward-sloping short-run Phillips curve (SRPC) and vertical long-run Phillips curve (LRPC) at the natural rate .
(b) Movement (1 point): show a move up and to the left along the SRPC; inflation rises and unemployment falls in the short run.
(c) Long run (1 point): the economy returns to the natural rate of unemployment (on the LRPC), but at a higher inflation rate.
(d) Shift (1 point): a negative supply shock shifts the SRPC right (outward), worsening the trade-off.
(e) Result (1 point): both inflation and unemployment rise (stagflation).
Markers reward the vertical LRPC at , the up-left short-run movement, the long-run return to , and the rightward SRPC shift from a supply shock.
Related dot points
- Topic 5.1 Fiscal and Monetary Policy Actions in the Short Run: combine fiscal and monetary policy to close output gaps, and trace their joint effects on output, the price level, and interest rates.
A focused answer to AP Macroeconomics Topic 5.1, covering how fiscal and monetary policy are combined to close recessionary and inflationary gaps, the difference between the two, and their joint effects on output, the price level, and interest rates, with a worked policy question.
- Topic 5.3 Money Growth and Inflation: apply the quantity theory of money and the equation of exchange to explain why sustained money growth raises the price level in the long run.
A focused answer to AP Macroeconomics Topic 5.3, covering the quantity theory of money, the equation of exchange, the long-run neutrality of money, and why sustained money growth causes inflation rather than real growth, with full worked calculations.
- Topic 3.6 Changes in the AD-AS Model in the Short Run: trace how shifts in aggregate demand or short-run aggregate supply change the price level, real output, and unemployment in the short run.
A focused answer to AP Macroeconomics Topic 3.6, covering demand shocks and supply shocks in the short run, their effects on the price level, real output, and unemployment, and how to read the resulting output gaps, with a worked graphing question.
- Topic 2.3 Unemployment: define the labor force and unemployment rate, calculate them, distinguish frictional, structural, and cyclical unemployment, and explain the natural rate and full employment.
A focused answer to AP Macroeconomics Topic 2.3, covering the labor force, the unemployment rate and labor force participation rate, frictional, structural and cyclical unemployment, the natural rate of unemployment, full employment, and limitations of the measure, with full worked calculations.
- Topic 3.7 Long-Run Self-Adjustment: explain how flexible wages and prices return the economy to full-employment output after a demand or supply shock, with no policy intervention.
A focused answer to AP Macroeconomics Topic 3.7, covering how the economy self-corrects from recessionary and inflationary gaps through flexible wages shifting short-run aggregate supply, the classical view, and the trade-off with active policy, with a worked graphing question.
Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)