Graph walkthrough · Macro · Phillips curve

A demand boom along the Phillips curve

Aggregate demand surges and firms hire fast.

Unemployment rateInflation rate0SRPCLRPCA₀

Step 1 of 3 · Before the boom

The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The short-run Phillips curve slopes down: lower unemployment goes with higher inflation. The long-run Phillips curve is vertical at the natural rate of unemployment. The economy sits at A₀, on both.

The chain in words

  1. Step 1

    Before the boom

    The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The short-run Phillips curve slopes down: lower unemployment goes with higher inflation. The long-run Phillips curve is vertical at the natural rate of unemployment. The economy sits at A₀, on both.

  2. Step 2

    A movement along the curve

    Firms hire to meet the extra orders, so unemployment falls below the natural rate. With workers scarce, wages and prices rise faster. The economy slides up and to the left along the short-run Phillips curve. No curve has moved: this is a movement along the SRPC.

  3. Step 3

    A real but temporary trade-off

    Lower unemployment was bought with higher inflation, and the curve itself has not changed. What happens next depends on whether people come to expect the new inflation rate.

Takeaway. A demand shock moves the economy along the short-run Phillips curve, it does not shift it.

Draw it yourself

This shock: draw the graphExpected inflation risesAn oil shock hitsA credible disinflation

More on the phillips curve graph

Expectations catch upAn oil shock on the Phillips curveA credible disinflationBetter job matching lowers the natural rate

Go deeper

Lesson: The Phillips Curve

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.
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