What is the short-run Phillips curve?

A downward-sloping relationship where, in the short run, lower unemployment comes with higher inflation and vice versa — the trade-off policymakers can lean on temporarily.

Why is the long-run Phillips curve vertical?

Because once inflation expectations catch up with reality, unemployment returns to its natural rate regardless of the inflation rate. There's no lasting trade-off, so the long-run curve is a vertical line at the natural rate.

What is the natural rate of unemployment?

The unemployment level the economy settles at when inflation is steady and correctly anticipated. Policy can push unemployment below it only temporarily, at the cost of rising inflation.

How do inflation expectations shift the curve?

When people expect higher inflation, they bake it into wages and prices, so the short-run curve shifts up: the same unemployment rate now comes with higher inflation.

The simultaneous rise of inflation and unemployment, typically caused by a supply shock. It contradicts the simple short-run trade-off, which assumes the two move in opposite directions.

Phillips Curve

Trade inflation for unemployment in the short run — and see why that tradeoff vanishes in the long run.

Understand why policymakers can trade inflation for unemployment in the short run but not the long run.

Inflation–unemployment tradeoff
Inflation expectations
Natural rate of unemployment
Long-run (vertical) Phillips curve
Stagflation

Guided walkthrough

Step 1 of 3

Predict first

Drag the demand/policy shock to the right (an expansion).

Before you act, predict what will happen. What happens to unemployment and inflation as the economy moves along the curve? Then do it — did your prediction match what happened?

Expected inflation

Natural rate of unemployment

Demand / policy shock

Inflation vs. unemployment

The short-run curve trades inflation for unemployment; the vertical long-run curve sits at the natural rate, where expectations have fully adjusted.

What is the Phillips curve?

The Phillips curve describes a short-run trade-off between inflation and unemployment: when policymakers stimulate demand, unemployment falls but inflation rises, and when they cool the economy, inflation falls but unemployment rises. For a while this looked like a stable menu of choices. The catch is expectations. Once people come to expect a given rate of inflation, they build it into wages and prices, and the short-run trade-off shifts — you need ever-higher inflation to keep unemployment below its natural rate. The natural rate of unemployment is the level the economy gravitates to when inflation is steady and correctly anticipated. In the long run, when expectations catch up with reality, there is no trade-off at all: the long-run Phillips curve is vertical at the natural rate, so trying to hold unemployment permanently lower just produces accelerating inflation with no lasting gain. Worse, a supply shock can push both inflation and unemployment up together — stagflation — which the simple curve says shouldn't happen. The Phillips curve is a lesson in why short-run policy levers don't translate into long-run control.

How the simulation shows it

You move a demand shock along the short-run curve and watch inflation and unemployment trade off, then raise expected inflation and see the whole curve shift up — the same unemployment now costing more inflation. Pushing it yourself reveals why the long-run curve is vertical at the natural rate: there's no permanent trade-off to exploit.

Common misconceptions

The inflation-unemployment trade-off isn't permanent. It holds only in the short run; once inflation expectations adjust, the curve shifts and the trade-off disappears.
Lower unemployment forever isn't on the menu. Trying to hold unemployment below its natural rate doesn't buy lasting employment — it just produces accelerating inflation.
Inflation and unemployment don't always move in opposite directions. A supply shock can raise both at once — stagflation — which the simple short-run trade-off can't explain.

Frequently asked questions

What is the short-run Phillips curve?: A downward-sloping relationship where, in the short run, lower unemployment comes with higher inflation and vice versa — the trade-off policymakers can lean on temporarily.
Why is the long-run Phillips curve vertical?: Because once inflation expectations catch up with reality, unemployment returns to its natural rate regardless of the inflation rate. There's no lasting trade-off, so the long-run curve is a vertical line at the natural rate.
What is the natural rate of unemployment?: The unemployment level the economy settles at when inflation is steady and correctly anticipated. Policy can push unemployment below it only temporarily, at the cost of rising inflation.
How do inflation expectations shift the curve?: When people expect higher inflation, they bake it into wages and prices, so the short-run curve shifts up: the same unemployment rate now comes with higher inflation.
What is stagflation?: The simultaneous rise of inflation and unemployment, typically caused by a supply shock. It contradicts the simple short-run trade-off, which assumes the two move in opposite directions.