EasyEcon

Intermediate macroeconomics

The Expectations-Augmented Phillips Curve

The short-run Phillips curve offers a tempting trade between inflation and unemployment — but only relative to expected inflation. Try to hold unemployment below the natural rate and expectations chase realized inflation upward, the short-run curve marches up, and inflation accelerates. The long-run Phillips curve is vertical: there is no permanent trade-off.

Macroeconomics Business cycle Intermediate Native JS Growth, business cycles, and open economy
Focus

The short-run trade-off, the vertical long-run curve, and accelerating inflation

Set the unemployment rate the central bank tries to hold and watch what happens to inflation: stable at the natural rate, accelerating below it, disinflating above it.

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Phillips Curve — explore it instantly

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The expectations-augmented Phillips curve The short-run Phillips curve trades off inflation against unemployment, but only relative to expected inflation. The long-run curve is vertical at the natural rate. Holding unemployment below the natural rate makes expectations — and inflation — accelerate upward. 023568 -10-26142230 Unemployment (%) Inflation (%)
Short-run Phillips curve Long-run (u*) Economy Pre-shock

How to read this

The short-run Phillips curve slopes down: when the central bank pushes unemployment lower, inflation rises — but only relative to what people expect. The long-run Phillips curve is vertical at the natural rate u*: in the long run, inflation can sit at any level, but unemployment returns to u*.

Hold unemployment below u* and the economy can't rest: realized inflation stays above expected inflation, so expectations keep climbing, the short-run curve marches upward, and inflation accelerates. There is no permanent trade — the only stable choice is u = u*.

What to explore

Change parameters and watch the model adjust.

  • Target unemployment, the natural rate, and the short-run curve's slope

Core ideas

Interpret the mechanics before you chase the graphs.

  • The short-run inflation–unemployment trade-off shifts with expected inflation.
  • The long-run Phillips curve is vertical at the natural rate of unemployment.
  • Pushing unemployment below the natural rate yields accelerating inflation, not a lasting gain.

Learning goals

What this model should help students internalize.

  • Read the short-run Phillips curve as a trade-off relative to expected inflation.
  • See why the long-run Phillips curve is vertical at the natural rate of unemployment.
  • Trace how holding unemployment below the natural rate makes inflation accelerate.

Prerequisites

Concepts to review before diving in.

  • Aggregate demand and aggregate supply
  • Inflation expectations

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