Short-Run Phillips Curve (SRPC)

What this diagram shows

The Short-Run Phillips Curve demonstrates the inverse relationship between inflation and unemployment rates when inflation expectations remain constant. It suggests that policymakers can temporarily reduce unemployment by accepting higher inflation, or reduce inflation by tolerating higher unemployment. This trade-off occurs because workers and firms have fixed expectations about future price levels, so unexpected changes in inflation can temporarily affect real wages and employment decisions. Understanding this diagram is crucial for analyzing monetary policy decisions and their short-term economic consequences.

Key points

• Shows an inverse (negative) relationship between inflation rate (y-axis) and unemployment rate (x-axis)
• The trade-off only exists in the short run when inflation expectations are held constant
• Movement along the curve represents policy choices - stimulating the economy moves up-left (lower unemployment, higher inflation)
• The curve's position depends on expected inflation - if expectations change, the entire curve shifts
• The natural rate of unemployment occurs where the curve intersects the long-run Phillips curve (vertical line)

Exam board notes

All major exam boards treat this diagram identically, emphasizing the temporary nature of the trade-off and the importance of inflation expectations. Some specifications may place slightly more emphasis on the mathematical relationship, but the core concepts remain consistent.