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Study Notes

The Short-run Phillips Curve

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 15 Jan 2023

The Phillips curve is an economic concept that describes the relationship between inflation and unemployment. The short-run Phillips curve is a representation of this relationship in the short-term, where inflation and unemployment are inversely related.

The short-run Phillips curve states that when unemployment is low, inflation tends to be high, and when unemployment is high, inflation tends to be low.

This is because when unemployment is low, employers are in competition for a limited number of workers, and they will have to offer higher wages to attract and retain employees.

As wages rise, the cost of goods and services also increases, leading to higher inflation.

Conversely, when unemployment is high, employers have a surplus of workers to choose from, and they do not have to offer as high wages to attract employees. As wages remain low, the cost of goods and services also remains low, leading to lower inflation.

It is important to note that the short-run Phillips curve is based on the assumption that prices and wages are "sticky" in the short run, meaning they do not adjust immediately to changes in the economy.

This means that changes in unemployment will only affect inflation with a lag.

In the long-run, the Phillips curve is considered to be vertical, meaning that inflation does not have any impact on unemployment. This is because in the long-run, prices and wages are able to adjust to changes in the economy, and the relationship between inflation and unemployment is not as strong.

It is also worth noting that the Phillips curve is a theoretical construct, and the relationship between inflation and unemployment may not always hold true in practice.

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