Macroeconomics · A module in twelve lessons
Inflation, unemployment and the Phillips curve
Can a government buy lower unemployment with a little more inflation, and for how long? That one question runs through this module. It starts with how a price index and an unemployment rate are built, goes on to why prices rise and what it costs, and then to the Phillips curve itself: the original trade-off, why expectations make it vanish in the long run, and where the natural rate comes from.
113past-paper questions, each placed in the lesson that teaches it
12of 12 lessons, all ready
13interactive labs, from a price-index basket to the Dial, the Natural-Rate Workbench and real US and Indian data
6questions left out as flawed or not markable, with the reason for each
This is a course, not a single article.All twelve lessons are ready. You need only school algebra. Each lesson opens with a real exam question, builds the idea with a diagram you can move, and ends with that question solved and a set of past papers. The course takes about 9 hours.
The path
Five parts, twelve lessons
The order is the logic of the subject. Two numbers come first, inflation and unemployment, because everything later is an argument about how they move together. Then the causes and costs of inflation, then the curve that links the two numbers, and then what happens when the economy is hit by a shock or the central bank tries to bring inflation down.
Elsewhere on the site: the one-page Phillips curve diagram shows the short-run and long-run curves moving, and the IS–LM to AD–AS module builds the demand and supply model this module leans on. India’s own inflation data, month by month, is in the India Atlas.
0 of 12 doneYour progress is saved on this device.
- Part 1Measuring
How a price index and an unemployment rate are built, and what each one leaves out.
- 1Measuring inflation: price indices and the inflation rateCPI, WPI and the GDP deflator, base year and basket, Laspeyres against Paasche, headline against core, and what India's CPI weights say about where inflation comes from.40 min · 5 past questions
- 2Measuring unemployment: stocks, flows and the natural rateThe labour force and the three ways to count, the unemployment rate and its denominator, frictional, structural and cyclical unemployment, and the rate that flows of workers settle at.40 min · 18 past questions
- Part 2Why prices rise, and what it costs
Demand-pull, cost-push and structural inflation, money and deficits, and the costs of inflation, deflation and disinflation.
- 3Causes of inflationDemand-pull, cost-push and structural inflation, money growth and the quantity equation in growth rates, deficits, the wage-price spiral and hyperinflation.40 min · 9 past questions
- 4The costs of inflation, deflation and disinflationAnticipated against unanticipated inflation, shoe-leather and menu costs, debtors and creditors, the real rate (exact against approximate), the inflation tax, and deflation.45 min · 14 past questions
- Part 3The trade-off
The Phillips curve and its history, Okun's law, why expectations make the long run vertical, and where the natural rate comes from.
- 5The original Phillips curve and the trade-offWage inflation against unemployment, the step to price inflation through the mark-up and productivity, why the slope is negative, and the menu of choice.40 min · 16 past questions
- 6Okun's law and the output gapThe gap form and the difference form, the coefficient as an estimate, the sign of the output gap, and the Phillips curve as aggregate supply.35 min · 8 past questions
- 7Expectations: Friedman, Phelps and the vertical long runWhy expected inflation shifts the curve, adaptive expectations, the accelerationist result, the vertical long-run curve, and the Keynesian and monetarist readings.50 min · 12 past questions
- 8Where the natural rate comes from: wage-setting and price-settingThe mark-up, bargaining, the three ways productivity can enter, efficiency wages, and the step from wage-setting and price-setting to the Phillips curve.55 min · 5 past questions
- Part 4Shocks and policy
Supply shocks and stagflation, and what it costs to bring inflation down.
- 9Supply shocks and stagflationWhy a supply shock moves the short-run curve, stagflation, and the policymaker's choice between accommodating the shock and fighting it.40 min · 7 past questions
- 10Bringing inflation down: credibility and the sacrifice ratioThe output cost of disinflation, cold turkey against gradual, the sacrifice ratio, and what credibility changes.40 min · 2 past questions
- Part 5Putting it together
The curve in real data, and the Delhi School's problems.
- 11The Phillips curve in the data: the US, and IndiaThe US by decade as loops, why a scatter of inflation against unemployment is not the curve, and India's food-driven swings.35 min · 0 past questions
- 12The hard problems: the Delhi School setThe DSE entrance's wage-setting, price-setting and Phillips curve questions, by technique.60 min · 17 past questions
Where to start
A two-minute check
One question from each lesson that has a question set. Your first wrong answer tells you where to begin.
Question 1 of 11
A price index rises from 120 to 132. Inflation is
For the exam hall
The relations worth carrying in
One line from each lesson. Each is proved in its lesson, with the traps beside it.
The lesson on one screen
- 1. Inflation
- (P₁ − P₀)/P₀, over the earlier year. Laspeyres uses base-year quantities and overstates; Paasche uses current ones.
- 2. Unemployment
- Unemployed ÷ labour force (not population). Steady state u = s/(s + f).
- 3. Causes
- Demand-pull: price and output rise together. Cost-push: price up, output down. Money: π ≈ μ − g + Δv.
- 4. Costs
- Real rate (1 + i)/(1 + π) − 1; the shortcut i − π holds at low rates. Seigniorage peaks at π = 1/α.
- 5. Original curve
- Negative: low unemployment, faster wage and price rises. With a fixed mark-up, π = w − λ.
- 6. Okun
- Output gap = β(u − uₙ), β = 2 in the exam problems; in differences, growth moves unemployment.
- 7. Expectations
- π = πᵉ − β(u − uₙ); πᵉ = (1 − θ)π̄ + θπ₋₁. θ = 1: inflation rises by β(uₙ − u) every year. Long run: vertical at uₙ.
- 8. Natural rate
- Where wage-setting meets price-setting. W/P = 1 − u with mark-up m gives m/(1 + m). Productivity: no effect, a rise or a fall, depending on how it enters.
- 9. Shocks
- π = πᵉ − β(u − uₙ) + ε. A supply shock shifts the curve; stagflation is high inflation with high unemployment.
- 10. Disinflation
- x points cost x/β point-years above uₙ. Sacrifice ratio = Okun coefficient ÷ β. Credibility lowers the bill.
- 11. Data
- A scatter mixes different curves. Compare a slope with its standard error.
- 12. Delhi School
- 1 + π = (1 + πᵉ)(1 + μ)F. Natural rate: (1 + μ)F = 1. Name the technique first.
Names and dates
Who said what: a short drill
The exams ask who first examined, developed or argued something. Each name below is taken from a source checked for the lesson, and the lessons carry the title and journal.
Pause and predict
Whose 1958 paper in Economica, on unemployment and the rate of change of money wages, gave the curve its name?
Pause and predict
Whose figure caption called the inflation and unemployment trade-off a 'menu of choice'?
Pause and predict
Who first examined the negative relation between unemployment and output?
Pause and predict
Whose 1968 presidential address to the American Economic Association argued there is no trade-off in the long run?
Pause and predict
Whose 1984 paper argued that unemployment works as a worker discipline device?
Pause and predict
Whose 1986 paper argued that Europe's persistent unemployment reflects hysteresis, with insiders and outsiders in wage bargaining?
Pause and predict
Whose 1993 paper discussed an interest-rate rule that responds to inflation and the output gap?
Real questions
Practise across the module
Hyderabad33
JNU19
Delhi School19
CUET-PG15
IIT JAM12
UGC NET10
GATE5
Questions placed in the lessons, by exam.
Hyderabad sets the most questions on this topic, and most are definitions: what the unemployment rate is, what stagflation means, what the Phillips curve shows. IIT JAM and GATE add calculations. The Delhi School’s questions, which are the hardest, ask you to derive the natural rate from wage-setting and price-setting; they are gathered in Lesson 12, by technique. All of them came from lesson 7 of the IS–LM module, which now points here.
Foundation
Definitions, formulas and one-step problems. Most CUET, UGC NET and Hyderabad questions on this topic sit here.
53 questionsPractise →
Standard
Statements to judge, matching lists and calculations with several steps, up to the hardest JNU, JAM and GATE questions.
43 questionsPractise →
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
Checked
What we checked, and what we left out
Every answer key in the practice sets was worked from the question’s text and options before it was placed; calculations are recomputed by a script from the same model that drives the labs, and the exercises in each lesson are recomputed the same way. A question is left out when its key or its stored text cannot be defended, and the reason is listed here so you can tell a hard question from a broken one.
- DSE 2007 Q32, Q33 and Q34. Each refers to a wage-price economy ('same setup') and uses λ and α, which the stored text never defines, so the keys cannot be checked.
- CUET 2026 Q68 (match the lists). The stored key is 'marks to all'. The correct matching is A–IV, B–I, C–II, D–III and no option gives it: option C swaps C and D.
- JNU 2014 Q9 (deflator inflation, 2012 to 13). It rests on a table with four suppressed cells, and the keyed 7.2% is only the nearest option to the 6.95% the rebuilt table gives, so a student cannot answer it from the page.
- JNU 2018 Q41. A written-answer question, which cannot be marked automatically.
A few keys hold only on a stated reading, and the lesson says which: for example, IIT JAM 2021’s “workforce participation rate” means employed over population (Lesson 2), and GATE 2021’s money-growth statement follows the quantity theory and so needs constant velocity (Lesson 1).
Quick answers
Questions people ask
What is the Phillips curve?
A negative relation between inflation and unemployment: when unemployment is low, wages and prices rise faster. The short-run curve is π = πᵉ − β(u − uₙ), and it shifts when expected inflation, the natural rate or supply conditions change.
What is the natural rate of unemployment?
The unemployment rate at which actual inflation equals expected inflation. It is found where wage-setting meets price-setting. It is not zero, because it includes frictional and structural unemployment.
Why is the long-run Phillips curve vertical?
In the long run expected inflation catches up with actual inflation. Holding unemployment below the natural rate makes inflation rise every year when expectations follow last year's inflation, so the trade-off lasts only until expectations adjust.
What is stagflation?
Rising prices together with weak or falling output: inflation and unemployment both high. It is the standard symptom of an adverse supply shock, which shifts the Phillips curve up and to the right.
What is the sacrifice ratio?
The output lost, as a percentage of one year's output, for each point of inflation removed. With expectations equal to last year's inflation it equals Okun's coefficient divided by β, the response of inflation to the unemployment gap.
What moves the natural rate?
Anything that raises firms' mark-up or workers' wage claim, such as less competition or more bargaining power, raises it. Whether productivity raises it, lowers it or leaves it unchanged depends on how productivity enters the wage claim.
Does the Phillips curve show up in real data?
Not as one clean line. In the World Bank data for the United States from 1991 the fitted slope of inflation on unemployment changes size and sign between decades, because expectations, supply shocks and the natural rate shift the curve.
What does the Delhi School entrance ask on this topic?
Wage-setting and price-setting problems in letters: the Phillips relation a wage rule implies, the natural rate it gives, what a change in productivity or the mark-up does to it, the NAIRU and the accelerationist path. Lesson 12 works all seventeen questions by technique.
Read next
All resources →MacroeconomicsMeasuring inflation: CPI, WPI, the GDP deflator, core inflation and index numbersA price index as the cost of a basket, Laspeyres against Paasche, the three indices and what each prices, headline against core inflation, the inflation rate and its denominator, and what India's CPI weights say about where inflation comes from.MacroeconomicsThe Phillips curve, short run and long runPush unemployment below its natural rate, then watch expectations catch up and pull it back, step by step.MacroeconomicsIS–LM 7: the Phillips curve as aggregate supplyThe Phillips curve as short-run supply seen from the labour market: the curve year by year, wage- and price-setting and the natural rate, and the cost of disinflation, with links to the full inflation and Phillips curve module.