Short-Run Phillips Curve vs Long-Run Phillips Curve
Short-Run Phillips Curve and Long-Run Phillips Curve are two Unemployment & Inflation concepts in AP Economics that students often mix up. The short-run Phillips curve shows the inverse relationship between the inflation rate and the unemployment rate in the short run. The long-run Phillips curve is vertical at the natural rate of unemployment, showing no permanent trade-off between inflation and unemployment. Here is how they compare side by side.
It suggests that policymakers may face a trade-off: lower unemployment can be achieved at the cost of higher inflation, and vice versa. This relationship breaks down in the long run due to adaptive expectations and shifts in the curve from supply shocks or changing expectations.
In the long run, expectations adjust, so trying to push unemployment below the natural rate only raises inflation. It corresponds to long-run aggregate supply at potential output. Only supply-side changes can shift it.
Short-Run vs Long-Run Phillips Curve: Is There a Trade-Off
| Short-run Phillips curve | Long-run Phillips curve | |
|---|---|---|
| Shape | Downward sloping | Vertical |
| Trade-off between inflation and unemployment | Yes | No |
| Located at | Wherever expected inflation puts it | The natural rate of unemployment |
| Shifted by | A change in expected inflation, or a supply shock | A change in the natural rate itself |
| Corresponds to | Short-run aggregate supply | Long-run aggregate supply |
| Movement along it caused by | A shift in aggregate demand | A sustained change in aggregate demand: once expectations adjust, inflation is permanently higher or lower at the same natural rate |
The trade-off exists only while expectations are wrong
In the short run, an increase in aggregate demand raises the price level and output together, so inflation rises and unemployment falls: a movement along the downward-sloping short-run Phillips curve. That works because wages were set on the basis of lower expected inflation, so real wages fall and firms hire. Once workers notice and negotiate higher nominal wages, the advantage disappears, employment returns to its natural rate, and the economy ends up with the same unemployment and higher inflation. The short-run curve has shifted up. The trade-off was real but temporary, and it existed only because expectations had not caught up.
The long-run curve is vertical for the same reason LRAS is
The two models are the same story told on different axes. Long-run aggregate supply is vertical at potential output; the long-run Phillips curve is vertical at the natural rate of unemployment, which is the unemployment consistent with that output. Both say that in the long run, nominal variables do not determine real ones. Any point on the long-run Phillips curve is a point where expected inflation equals actual inflation, so nobody is fooled and unemployment sits at its natural rate whatever the inflation rate happens to be. Being able to map one diagram onto the other is worth practising; see /glossary/compare/short-run-aggregate-supply-vs-long-run-aggregate-supply.
Demand shocks move you along, supply shocks move the curve
This is the distinction questions test. A change in aggregate demand moves the economy ALONG the short-run Phillips curve, trading inflation against unemployment. A supply shock, an oil price spike, shifts the short-run curve outward, raising inflation AND unemployment at once, which is stagflation and why it is so hard to treat. A change in expected inflation also shifts the curve, which is the mechanism behind the long-run return to the natural rate. If a question describes both inflation and unemployment rising, the curve moved and the cause is on the supply side. Set it up at /sandbox/phillips-curve.
Frequently asked questions
Why is the long-run Phillips curve vertical?
Because in the long run expectations adjust to actual inflation, so no rate of inflation can hold unemployment away from its natural rate. Any attempt to exploit the short-run trade-off eventually raises expected inflation, shifting the short-run curve up until unemployment returns to the natural rate at a higher inflation rate.
What shifts the short-run Phillips curve?
A change in expected inflation, or a supply shock. Higher expected inflation shifts it up, so every unemployment rate now comes with more inflation. An adverse supply shock such as an oil price spike shifts it out, raising inflation and unemployment together, which is stagflation.
Is there really a trade-off between inflation and unemployment?
In the short run yes, while expectations lag behind actual inflation. In the long run no: the curve is vertical at the natural rate, so sustained higher inflation buys no permanent reduction in unemployment. The short-run trade-off is real but temporary, and exploiting it repeatedly just raises inflation.
Live Phillips Curve graph. Drag the curves, or open the full version.
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