The Phillips Curve (Macro Review) - Macro Topic 5.2 - Mr. Clifford: Hey, how you doing Econ students? This is Mr. Clifford. Welcome to ACDCecon. Right now, we're going to do a quick review of the Phillip's curve. [MUSIC] Remember, the economy can only be in one of three places at any given period of time: A recessionary gap, an inflationary gap, or at full employment. It turns out that the Phillip's curve shows exactly just that. Up here we have inflation and down here we have unemployment. In the short run, the Phillip's curve looks like this; it's downward sloping. In the long run, the Phillip's curve is vertical. Now let's use the graph to find the three different places the economy can be in. The easiest one is right here, which is the idea of full employment. This is the idea of the natural rate of unemployment. Remember, 0% unemployment is not the goal for the economy. We're always going to have frictional and structural unemployment. And so 4% to 6% unemployment is considered full employment. In this case, let's just call it 5% unemployment. That's the idea of the natural rate of unemployment. Now, what does a recession look like on this graph? Well it's a point right there. Notice how there's high unemployment, which is the bad thing of a recession. But what's the good thing? Well, low inflation. That's the idea of a recessionary gap. An inflationary gap is up here. Notice we have high inflation, which sucks. But the good news about having inflationary gap is we have low unemployment. The AP test will ask you draw this graph showing the three different options just like they do with aggregate demand and supply. The economy is either in a recessionary gap, full employment, or an inflationary gap. Hey, bonus round! Just like aggregate demand and supply, the Phillip's curve can also shift. So the best way to show this is by having the graphs next door to each other. Over here we have aggregate demand supply and over here we have the Phillip's curve. And they're both showing full employment. If aggregate supply shifts to the left and we have stagflation, remember, higher price level and low output, we're going to get a new point, point B. That point B is somewhere on the Phillip's curve. Well, we have a higher price level and low output which means we have high unemployment. That means the Phillip's curve has shifted to the right. We have more inflation and more unemployment. So here's the rule: When aggregate demand shifts, there'll be movement along the Phillip's curve. But when aggregate supply shifts, the entire short run Phillip's curve will shift. Bonus, bonus round! We're back at full employment on both graphs. Let's say there's an increase in aggregate demand leading to inflationary gap. And since demand shifts, we have a point on the short run Phillip's curve right there. Remember this is the short run. What's going to happen in the long run on both graph's? In the long run, when we have inflation, wages will eventually go up and resource prices will eventually go up. That means the aggregate supply curve will shift to the left putting us back at the long run aggregate supplier. Back at full employment. That new point, point C is somewhere on that graph. Aggregate supply shifting means the Phillip's curve will shift to the right. That puts us right there at point C. Both of them showing the idea of the long run. Now that completely explains why we have these two vertical lines. This line shows how much we're going to produce in our economy at full employment. And this vertical line shows the natural rate of unemployment. The amount of unemployment we're going to have when we're in the long run. Don't forget to check out my other videos and my review at. Till next time.