Macroeconomics · Interactive
The Phillips curve, short run and long run
A demand boom buys lower unemployment with a burst of unexpected inflation, for a while. Move expected inflation, the natural rate, or how sharply the two react to each other, and watch exactly why that trade-off never lasts.
u 5.0 · π 4.0
Short-run curve (SRPC)Long-run curve (LRPC)Actual point
The maths, with your numbers
Short-run Phillips curveπ = π^e − β(u − u_n)π = 4.0 − 1.0(u − 5.0)
Unemployment gapu − u_n+0.0
Inflation surpriseπ − π^e = −β(u − u_n)+0.0
Actual inflation at uπ4.0
1
Start on the natural rate
At u = u_n the two curves cross: whatever people expected to happen, happened. Actual inflation equals expected inflation exactly, so there's no surprise to react to.
2
A demand boom pushes unemployment down
More spending pulls unemployment below u_n. Firms and workers raise prices and wages faster than anyone expected, so actual inflation runs above π^e. A real boom, for now.
3
Expectations catch up
Once people notice inflation is actually running at 6%, they revise π^e to match. That shifts the whole SRPC up. Unemployment drifts back to u_n, but inflation has now settled permanently higher.
4
The trade-off vanishes in the long run
Compare where you started and where you ended up: unemployment is right back at u_n both times, only inflation moved. That's the whole reason the long-run curve is drawn vertical: a single shock buys a temporary trade-off, never a lasting one.
Reading the diagram
What moves, and why
Two curves, one pivot point
The short-run curve (SRPC) always passes through (un, πe), where actual unemployment sits at the natural rate and actual inflation matches what was expected. That point is also where the vertical long-run curve (LRPC) sits.
Moving along the SRPC is the short-run story
A demand shock moves you along the current SRPC: unemployment below un comes with inflation above what was expected, and unemployment above un comes with inflation below it. Nothing about expectations has changed yet.
Expectations catching up is the long-run story
Once πe updates to match what actually happened, the whole SRPC shifts to pivot through the new point. Repeat that enough times and every point you can actually rest at sits on the vertical LRPC, at u = un.
Watch out for
Where this trips people up on the paper
- Only expectations shift the SRPC. A change in un itself (from a structural reform, a demographic shift or better job-matching) moves both curves together. A demand or supply shock, by itself, never does.
- “Below the natural rate” means a boom, not a bust. It is the single most common sign flip on this topic: unemployment below un is the economy running hot, with inflation above what was expected, not the other way round.
- One shock buys a temporary trade-off, never a permanent one. A question asking whether a country can hold unemployment below un forever by accepting a bit more inflation is testing exactly one thing: whether you know the long-run curve is vertical.
Try it on real questions
From CUET-PG and IIT JAM
Five questions on exactly this: reading the short-run trade-off, why the long-run curve is vertical, and a numeric expectations-augmented Phillips curve problem.
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.
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