AP Macroeconomics

## Learning Outcomes

- Understand why the long-run Phillips curve is vertical
- Identify the natural rate of unemployment and how it relates to the LRPC
- Explain why there is no long-run tradeoff between inflation and unemployment
- Distinguish between movements along the SRPC and shifts of the SRPC
- Distinguish between SRPC shifts and LRPC shifts
- Apply Phillips curve reasoning to AP Macroeconomics graph and FRQ questions

## AP Macroeconomics Syllabus

For the AP Macroeconomics, you are expected to understand the long-run Phillips curve and its connection to unemployment and inflation, with a focus on the following syllabus points:

- Know that the **long-run Phillips curve (LRPC)** is vertical at the **natural rate of unemployment**
- Identify the correct graph axes: **inflation rate** on the vertical axis and **unemployment rate** on the horizontal axis
- Explain why there is **no long-run tradeoff** between inflation and unemployment
- Understand that the **short-run Phillips curve (SRPC)** is downward sloping, but the LRPC is vertical
- Distinguish between a movement along the SRPC caused by changes in aggregate demand and an SRPC shift caused by changes in expected inflation
- Understand that in the long run, unemployment returns to the natural rate as wages and inflation expectations adjust
- Know that changes in the natural rate of unemployment shift the LRPC, while changes in expected inflation shift the SRPC

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Why is the long-run Phillips curve drawn as a vertical line?
2. What does the natural rate of unemployment include, and what does it exclude?
3. How can expansionary policy reduce unemployment in the short run but not in the long run?
4. What causes a movement along the SRPC, and what causes a shift of the SRPC?
5. What kind of change would shift the LRPC itself?

## Introduction

The Phillips curve is one of the key graphs in AP Macroeconomics because it links two major macroeconomic problems: **inflation** and **unemployment**. In the short run, there can be a tradeoff between them. In the long run, that tradeoff disappears. That is why the long-run Phillips curve is drawn as a vertical line.

This matters on the AP exam because students are often asked to draw the graph, explain why the LRPC is vertical, or connect Phillips curve movements to monetary or fiscal policy. If you can explain how the economy returns to the natural rate of unemployment after expectations adjust, you understand the core idea.

> **Key Term: long-run Phillips curve (LRPC)**
> The Phillips curve in the long run, drawn as a vertical line at the natural rate of unemployment, showing no permanent tradeoff between inflation and unemployment.

### What the vertical LRPC shows

The Phillips curve graph has **inflation rate** on the vertical axis and **unemployment rate** on the horizontal axis. In the short run, the curve slopes downward. In the long run, it is vertical.

Why vertical? Because in the long run, the economy returns to its normal or sustainable unemployment level, called the natural rate. Higher inflation cannot keep unemployment permanently below that rate.

> **Key Term: natural rate of unemployment**
> The unemployment rate that exists when the economy is at full employment; it includes frictional and structural unemployment but not cyclical unemployment.

A common mistake is to think the natural rate means **0% unemployment**. That is wrong. Even in a healthy economy, some workers are between jobs and some workers do not match available jobs. So the natural rate is positive.

Another common mistake is to think the LRPC means inflation does not matter in the long run. That is also wrong. Inflation can be higher or lower in the long run. The point is that unemployment still returns to the natural rate. So different inflation rates can occur on the same vertical LRPC, but the unemployment rate remains at the natural rate.

Imagine an economy at full employment. If aggregate demand rises, firms initially hire more workers and unemployment falls. But this does not last. As wages and inflation expectations adjust, production returns to potential output and unemployment goes back to the natural rate. The only lasting effect is a higher inflation rate.

That is the meaning of **no long-run tradeoff**. A country cannot permanently “buy” lower unemployment by accepting higher inflation.

> **Key Term: no long-run tradeoff**
> The idea that in the long run, a higher inflation rate cannot permanently reduce unemployment below the natural rate.

You can also connect this to the AS/AD model. In the short run, an increase in aggregate demand can raise output and lower unemployment. In the long run, wages adjust, short-run aggregate supply shifts, real GDP returns to potential, and unemployment returns to the natural rate. The Phillips curve version of that story is movement to a new point with the same unemployment rate but a different inflation rate.

> **Test Tip:** On an FRQ, if you are asked to draw the Phillips curve in the long run, always make the LRPC vertical and place it at the natural rate of unemployment given in the question, such as 4% or 5%. Do not assume one fixed number for every question.

### Why short-run policy effects disappear in the long run

To see why the LRPC is vertical, you need the adjustment process, not just the final graph shape.

Start with expansionary policy. Suppose the central bank increases the money supply or the government increases spending. Aggregate demand rises. In the short run, firms sell more output, hire more workers, and unemployment falls below the natural rate. Inflation rises. On the Phillips curve, that is movement up and to the left along a given SRPC.

But workers and firms do not ignore this forever. When actual inflation turns out to be higher than expected, workers realize their real wages have fallen more than they thought. They demand higher nominal wages. Firms face higher costs and raise prices further. Expected inflation rises.

As expected inflation rises, the short-run Phillips curve shifts upward. The economy then moves back to the natural rate of unemployment, but now at a higher inflation rate.

This is the central logic of the expectations-augmented Phillips curve. You do not need heavy algebra for AP, but the intuition matters: unexpected inflation can lower unemployment temporarily; expected inflation cannot.

> **Key Term: expected inflation**
> The rate of inflation that workers, firms, and consumers expect to occur in the future.

The reverse process also works. Suppose policy makers reduce aggregate demand to fight inflation. In the short run, inflation falls and unemployment rises above the natural rate. But over time, lower inflation changes expectations. Workers accept lower wage growth, firms face less cost pressure, and the economy returns to the natural rate of unemployment. The result is lower inflation, not permanently higher unemployment.

This is why the long-run Phillips curve is vertical whether inflation is rising or falling. The economy can move temporarily away from the natural rate, but it does not stay there.

A useful cause-and-effect chain is:

1. Policy changes aggregate demand
2. Unemployment moves away from the natural rate in the short run
3. Actual inflation differs from expected inflation
4. Workers and firms adjust wage and price expectations
5. SRPC shifts
6. Unemployment returns to the natural rate
7. Inflation settles at a new rate

Students often stop at step 2 and miss the long-run story. That is the main reason they draw the LRPC incorrectly.

> **Test Tip:** In written responses, use the phrase: “In the long run, inflation expectations adjust, so unemployment returns to the natural rate.” That sentence often earns explanation credit because it gives both the mechanism and the conclusion.

### SRPC movements, SRPC shifts, and LRPC shifts

Many exam errors come from mixing up three different ideas:

1. Movement along the **SRPC**
2. Shift of the **SRPC**
3. Shift of the **LRPC**

Keep them separate.

A **movement along the SRPC** happens when aggregate demand changes and expected inflation stays the same. For example:

- Expansionary policy raises inflation and lowers unemployment temporarily
- Contractionary policy lowers inflation and raises unemployment temporarily

That is movement along a given short-run curve.

> **Key Term: short-run Phillips curve (SRPC)**
> A downward-sloping curve showing a temporary inverse relationship between inflation and unemployment for a given level of expected inflation.

An **SRPC shift** happens when expected inflation changes, or when supply shocks change inflation at each unemployment rate. For AP Macro, the safest emphasis is expected inflation.

- If expected inflation increases, the SRPC shifts upward/right
- If expected inflation decreases, the SRPC shifts downward/left

Why? Because if workers expect faster inflation, they demand higher wages sooner. Firms then face higher costs and raise prices more at every unemployment rate.

An **LRPC shift** is different. The LRPC shifts only if the **natural rate of unemployment** changes. That means something structural changes in the labor market, not just aggregate demand.

Examples that could change the natural rate include:

- Better job matching
- Changes in labor market institutions
- Lasting changes in worker skills
- Structural changes that alter frictional or structural unemployment

For AP purposes, you should keep the wording simple: if the natural rate changes, the vertical LRPC moves left or right.

A fall in the natural rate shifts the LRPC left. A rise in the natural rate shifts it right.

> **Key Term: NAIRU**
> A closely related term for the unemployment rate associated with stable inflation; in AP Macroeconomics, it is usually treated similarly to the natural rate of unemployment.

AP questions usually prefer **natural rate of unemployment** as the main term, so use that first. You can treat NAIRU as enrichment, not as your main exam language.

A useful comparison is:

- **AD change** → movement along SRPC
- **Expected inflation change** → SRPC shifts
- **Natural rate change** → LRPC shifts

If you remember that sequence, most graph questions become much easier.

### How to answer AP graph and FRQ questions well

On the exam, graph accuracy matters. A correct explanation with a bad graph can lose points, and a neat graph can earn points quickly.

For a Phillips curve graph, include:

- Vertical axis: **inflation rate**
- Horizontal axis: **unemployment rate**
- Downward-sloping **SRPC**
- Vertical **LRPC**
- Label the natural rate of unemployment where the LRPC stands

If the prompt gives a specific natural rate, such as 5%, put the LRPC there. If the prompt does not give a number, label it generally as the natural rate.

A typical FRQ might ask what happens after expansionary monetary policy. A strong answer would say:

- Aggregate demand increases
- In the short run, unemployment falls and inflation rises
- The economy moves up the SRPC
- In the long run, expected inflation rises
- The SRPC shifts upward
- Unemployment returns to the natural rate on the vertical LRPC

That sequence is much better than only saying “inflation rises and unemployment falls.”

Another common task is explaining why the long-run Phillips curve is vertical. A strong answer should include all three ideas:

- wages and prices adjust
- inflation expectations adjust
- unemployment returns to the natural rate

If one of those is missing, the explanation is weaker.

Worked example:

Suppose the economy starts at the natural rate of unemployment of 5%. The central bank uses expansionary monetary policy.

Step 1: In the short run, aggregate demand rises.  
Step 2: Firms increase output and hire more labor.  
Step 3: Unemployment falls below 5%, say to 4%.  
Step 4: Inflation rises because demand is stronger.  
Step 5: Workers notice actual inflation is higher than expected.  
Step 6: They demand higher nominal wages.  
Step 7: Production costs rise, so firms raise prices further.  
Step 8: The SRPC shifts upward.  
Step 9: Unemployment returns to 5%.  
Step 10: The final result is higher inflation, but unemployment back at the natural rate.

So the long-run effect is not permanently lower unemployment. It is a higher inflation rate at the same natural rate of unemployment.

Common student errors:

- Drawing the LRPC as downward sloping
- Labeling the axes backwards
- Saying the natural rate is zero
- Treating every fall in unemployment as a shift of the Phillips curve
- Forgetting that expected inflation shifts the SRPC
- Forgetting that only a change in the natural rate shifts the LRPC
  > **Test Tip:** For FRQs, write in chains: “Policy action → AD change → SRPC movement → expectation adjustment → SRPC shift → return to natural rate.” That structure matches how AP scorers reward multi-step reasoning.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The Phillips curve has inflation on the vertical axis and unemployment on the horizontal axis
- The short-run Phillips curve is downward sloping
- The long-run Phillips curve is vertical at the natural rate of unemployment
- The natural rate of unemployment includes frictional and structural unemployment, but not cyclical unemployment
- The natural rate of unemployment is not 0%
- There is no long-run tradeoff between inflation and unemployment
- Expansionary policy can reduce unemployment below the natural rate only temporarily
- In the long run, wages and inflation expectations adjust
- As expectations adjust, unemployment returns to the natural rate
- Changes in expected inflation shift the SRPC
- Changes in the natural rate of unemployment shift the LRPC
- AP graph questions require a vertical LRPC placed at the natural rate of unemployment

## Key Terms and Concepts

- long-run Phillips curve (LRPC)
- natural rate of unemployment
- no long-run tradeoff
- expected inflation
- short-run Phillips curve (SRPC)
- NAIRU


The Phillips Curve - LRPC vertical at natural rate