Principles of Macroeconomics / Unit 9 MAC 0837 worked example, 60 to 90 seconds
Along the Curve or a Shift
The idea
Classify a movement in inflation and unemployment as a movement along a short-run Phillips curve or a shift of it. The test is which curve of unit eight's diagram moved. Aggregate demand moving along an unchanged short-run supply curve traces the Phillips curve. Short-run supply moving shifts the Phillips curve instead.
In practice
A contractionary policy that shifts aggregate demand left lowers output and the price level together, so unemployment rises and inflation falls: that is a movement along the curve, toward the upper left of the unemployment axis. An expansionary policy does the reverse and moves down the other way. Now take a sharp rise in energy prices across the economy. Short-run supply shifts left, output falls and the price level rises, so unemployment and inflation rise together. No point on a single downward-sloping curve does that, so the curve itself has moved.
Where people slip
Rising inflation means the price level is rising at an increasing rate, not merely that it is rising. Falling inflation means the price level is still rising, more slowly. Reading falling inflation as falling prices turns a recovery into a deflation and is the most common misreading of these diagrams.
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