5 Steps to a 5 AP Macroeconomics 2019

120 ❯ Step 4. Review the Knowledge You Need to Score High

Supply Shocks and the Phillips Curve

We saw that when SRAS shifts to the right, holding AD constant, both the price level and

unemployment rate fall. On the other hand, when SRAS shifts to the left, we get stagflation

because inflation and unemployment rates are both rising. Figure 9.21 shows how supply

shocks shift the Phillips curve inward when SRAS shifts to the right, and outward when

SRAS shifts to the left.

AD 0

Real GDP

Price

Level

PL 0

GDP 0

AD 1

SRAS

AD 2

Figure 9.19

Figure 9.20

The Phillips Curve

The inverse relationship between inflation and the unemployment rate has come to be

known as the Phillips curve and in the short­run is downward sloping. The short­run

Phillips curve is drawn in Figure 9.20. Though Figure 9.20 does not show it, the possibil­

ity of deflation at extremely high unemployment rates means that the Phillips curve may

actually continue falling below the x-axis.

Phillips

Curve (SR)

Unemployment

Rate (%)

Inflation

Rate (%)

KEY IDEA