No Bull Economics Lessons

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How do inflation expectations affect the Phillips curve?

Posted on April 17, 2014 at 12:15 AM

Inflation expectations are a determinant of the short-run aggregate supply curve. When the short-run aggregate supply curve shifts one direction, the short-run Phillips curve shifts the opposite direction.


If inflation expectations rise, SRAS shifts leftward raising the price level and unemployment (stagflation). To illustrate an increase in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the right (see the No Bull Review diagram below).



If inflation expectations fall, SRAS shifts rightward lowering the price level and unemployment. To illustrate a decrease in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the left.


Inflation expectations do not affect the vertical long-run Phillips curve.


AP Macroeconomics Unit 5 Macroeconomic Theory

Categories: AP Macroeconomics, Macro Unit 5 Macroeconomic Theory

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