Phillips Curve graph mistakes

11 ways students lose points on this diagram, each taken from a worked free-response scenario. Every entry names the reasoning that causes the error, not just the error, because the wrong answer is usually a sensible thought applied to the wrong curve.

1. 01

   New Wage Contracts

   The mistake. The frequent wrong answer is to shift the LRPC right as well, on the reasoning that higher inflation must eventually worsen unemployment. The natural rate depends only on frictional and structural conditions in the labor market, and a change in what people expect inflation to be leaves job matching and skills exactly as they were.

   Draw this instead. SRPC shifts up (right).

   Exam tip. Whenever a stem changes what people EXPECT inflation to be, move the SRPC only, and move it in the same direction as the expectation: expectations up means the SRPC goes up and to the right.

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2. 02

   Faster Job Matching

   The mistake. Students often move the SRPC on its own and leave the vertical curve where it is, treating easier job search as if it were a fall in expected inflation. Faster matching lowers frictional unemployment, and frictional unemployment is part of the natural rate itself, so the vertical LRPC has to relocate.

   Draw this instead. LRPC shifts left and SRPC shifts down (left).

   Exam tip. Ask whether the event changes how long job search takes or how well workers and openings fit each other. If it does, the natural rate moved, so the vertical LRPC must move and the whole model re-anchors on the new rate.

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3. 03

   Persistent Energy Shock

   The mistake. A common wrong answer is to shift the SRPC left because an oil shock is bad news and students associate bad news with a leftward move. On this graph the horizontal axis is unemployment, so left means less inflation AND less unemployment, which is the opposite of stagflation.

   Draw this instead. SRPC shifts up (right).

   Exam tip. Adverse supply shock means stagflation, and stagflation on the Phillips curve is the upper-right direction: more inflation paired with more unemployment. Pair it with SRAS shifting left on AD-AS so the two graphs always tell the same story.

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4. 04

   Automation Displaces Workers

   The mistake. Students frequently move only the SRPC, reading 'workers lose their jobs' as a short-run event. Automation that permanently strands workers whose skills no longer fit the openings that remain raises structural unemployment, and structural unemployment is a component of the natural rate, so the vertical curve is what has to move.

   Draw this instead. LRPC shifts right and SRPC shifts up (right).

   Exam tip. Permanent skills mismatch is a natural-rate story, never a short-run one. If a stem says jobs are gone for good and the displaced workers cannot fill what is still open, relocate the model to the higher natural rate instead of raising the inflation associated with each unemployment rate.

   Try this one on a live graph
5. 05

   Credible Inflation Target

   The mistake. The usual error is to shift the LRPC left, treating a credible central bank as something that permanently buys lower unemployment. Credibility changes only the inflation rate people build into wages and prices; it does not change the frictional and structural forces that set the natural rate.

   Draw this instead. SRPC shifts down (left).

   Exam tip. Lower expected inflation moves the SRPC down and to the left. Graders almost always want the sentence 'the LRPC does not shift' as well, so write it out explicitly rather than leaving it implied by your drawing.

   Try this one on a live graph
6. 06

   New Payroll Tax

   The mistake. The frequent wrong answer is to move the LRPC right, reasoning that taxing every hour of labor must permanently price some workers out of jobs. The stem holds the frictional and structural determinants of the natural rate constant, and in the AP model a broad rise in per-unit production costs is a short-run supply-side shock, so only the SRPC moves.

   Draw this instead. SRPC shifts up (right).

   Exam tip. Any economy-wide rise in per-unit production costs is one shock drawn twice: SRAS left on AD-AS, SRPC up and to the right here. It does not matter whether the cost came from wages, imported inputs, or a tax employers must pay.

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7. 07

   Global Commodity Glut

   The mistake. Students often push the SRPC right because cheap inputs sound like good news and rightward feels like growth. The horizontal axis here is unemployment, not real GDP, so right means MORE unemployment at every inflation rate, and a favorable supply shock belongs in the lower left.

   Draw this instead. SRPC shifts down (left).

   Exam tip. Say the axes out loud before you draw: unemployment across, inflation up. Falling input prices move the SRPC down and to the left, the exact mirror of the direction you drew for the oil shock.

   Try this one on a live graph
8. 08

   Productivity Breakthrough

   The mistake. The tempting wrong answer is LRPC left, imported from AD-AS where a productivity gain shifts LRAS right. Productive capacity is an AD-AS idea; the LRPC is fixed by how well workers and job openings match, and producing more per hour does not by itself make matching easier.

   Draw this instead. SRPC shifts down (left).

   Exam tip. Rising output per hour with nominal wages unchanged is the textbook definition of falling per-unit labor costs, so move the SRPC down and to the left, and do not import the LRAS shift you would draw on the other graph.

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9. 09

   Longer Jobless Benefits

   The mistake. The most common error is to move the SRPC up and to the right, reading 'unemployment goes up' as something that has to happen at a given inflation rate. Nothing here changed firms' costs or expected inflation; what changed is how long the unemployed search, which is frictional unemployment and therefore part of the natural rate itself.

   Draw this instead. LRPC shifts right.

   Exam tip. Sort every labor-market policy with one question: does it change how quickly the unemployed accept jobs, or does it change costs and expected inflation? Search behavior moves the vertical LRPC; costs and expectations move the SRPC.

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10. 10

    National Retraining Program

    The mistake. Students frequently shift the SRPC down and to the left instead, because more people working sounds like the good-news corner of this graph. Retraining changes who is able to fill openings that already exist, which is the structural piece of the natural rate, so the vertical curve is the one that moves.

    Draw this instead. LRPC shifts left.

    Exam tip. Keep two lists ready: retraining, better job-search technology, and relocation aid lower the natural rate; longer benefits, permanent skills mismatch, and more first-time job seekers raise it. Anything on either list means you move the LRPC.

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11. 11

    Wave of New Graduates

    The mistake. Many students draw nothing at all, since nobody was laid off and no cost changed, and others nudge the SRPC up because 'more unemployment' feels like a short-run event. Who makes up the labor force is a determinant of frictional unemployment, and frictional unemployment sits inside the natural rate, so the vertical curve moves right.

    Draw this instead. LRPC shifts right.

    Exam tip. A stem about WHO is in the labor force, rather than about costs or expectations, is always a natural-rate question. More inexperienced searchers means a higher natural rate: move the LRPC right and leave the inflation side of the model alone.

    Try this one on a live graph