No Bull Economics Lessons

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