AP Macroeconomics

## Learning Outcomes

- Understand why the long-run Phillips curve is vertical
- Identify the natural rate of unemployment and what it includes
- Explain when the long-run Phillips curve shifts and when it does not
- Distinguish clearly between SRPC movements, SRPC shifts, and LRPC shifts
- Apply labor-market examples to predict rightward or leftward shifts of the LRPC
- Avoid common AP exam errors about inflation, aggregate demand, and long-run unemployment

## AP Macroeconomics Syllabus

For the AP Macroeconomics, you are expected to understand how changes in the natural rate of unemployment affect the long-run Phillips curve, with a focus on the following syllabus points:

![Long-run Phillips curve shifts left or right as the natural rate of unemployment falls or rises, while remaining vertical across inflation rates.](https://static.pastpaperhero.com/images/ap-macroeconomics-the-phillips-curve-natural-rate-changes-shift-lrpc_00.png)

_Changes in the natural rate of unemployment shift the vertical LRPC horizontally, separating labor-market effects from movements along the SRPC._

- Know that the **long-run Phillips curve (LRPC)** is vertical at the natural rate of unemployment
- Identify that the **natural rate of unemployment** includes frictional and structural unemployment, but not cyclical unemployment
- Explain that the LRPC shifts only when the natural rate of unemployment changes
- Understand that if the natural rate rises, the LRPC shifts right, and if it falls, the LRPC shifts left
- Distinguish between a movement along the SRPC caused by aggregate demand and a shift of the LRPC caused by labor-market conditions
- Recognise that long-run adjustment after a demand shock usually shifts the SRPC, not the LRPC
- Apply examples such as training, job matching, mobility, skill mismatch, minimum wage laws, and labor-market rigidities

## 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 types of unemployment are included in the natural rate of unemployment?
3. What happens to the LRPC if structural unemployment increases?
4. Does a rise in inflation by itself shift the LRPC?
5. How is a shift in the LRPC different from a movement along the SRPC?

## Introduction

The Phillips curve is one of the most tested graphs in AP Macroeconomics because it links inflation and unemployment. In the short run, students learn the tradeoff: lower unemployment tends to come with higher inflation, and higher unemployment tends to come with lower inflation. But that tradeoff does not last forever.

For the long run, the key idea is much stricter. The economy returns to a particular unemployment rate called the **natural rate of unemployment**. That is why the **long-run Phillips curve** is vertical. The most important rule in this subtopic is simple: the LRPC shifts only if the natural rate itself changes.

> **Key Term: long-run Phillips curve (LRPC)**
> The vertical Phillips curve showing that in the long run there is no permanent tradeoff between inflation and unemployment.

### Why the LRPC is vertical

The long-run Phillips curve is vertical because, in the long run, inflation does not determine the unemployment rate. A country can have low inflation, moderate inflation, or high inflation, but its long-run unemployment rate settles at the natural rate.

Why does this happen? Start with an expansionary policy. Suppose the central bank increases the money supply. In the short run, aggregate demand rises. Firms sell more, hire more workers, and unemployment falls. At the same time, inflation rises. On the SRPC, that looks like movement up and to the left.

But this lower unemployment does not last. As wages and inflation expectations adjust, the short-run Phillips curve shifts. The economy returns to its long-run unemployment rate, but now with a higher inflation rate. So policy can change inflation permanently, but not unemployment permanently.

This is exactly what the vertical LRPC shows. Moving upward on a vertical line means inflation changes while unemployment does not.

> **Key Term: natural rate of unemployment**
> The unemployment rate that exists at full employment, made up of frictional and structural unemployment but not cyclical unemployment.

A common mistake is to think the natural rate means zero unemployment. That is wrong. Even in a healthy economy, some workers are changing jobs, entering the labor force, or dealing with skill mismatches. So some unemployment always remains.

> **Key Term: full employment**
> A situation in which the economy has no cyclical unemployment and unemployment equals the natural rate.

Another common mistake is to say that an increase in aggregate demand shifts the LRPC. It does not. Aggregate demand changes can move the economy along a short-run Phillips curve and may later cause the SRPC to shift, but the LRPC stays fixed unless the natural rate changes.

> **Test Tip:** On an FRQ, if the question describes a demand-side policy such as lower interest rates, higher government spending, or lower taxes, do not shift the LRPC unless the question also changes the natural rate of unemployment.

### What the natural rate includes and excludes

To understand when the LRPC shifts, you need to know what determines the natural rate.

The natural rate includes two forms of unemployment:

- **Frictional unemployment**: workers between jobs, new graduates searching, people entering or re-entering the labor force
- **Structural unemployment**: workers whose skills, location, or experience do not match available jobs

It does not include cyclical unemployment. Cyclical unemployment happens during recessions, when aggregate demand is too low. That type of unemployment can rise or fall during the business cycle without changing the natural rate.

> **Key Term: frictional unemployment**
> Short-term unemployment caused by normal job search, moving between jobs, or entering the labor force.
>
> **Key Term: structural unemployment**
> Unemployment caused by a mismatch between workers and jobs, such as skill gaps, location problems, or changes in the economy.

This distinction matters because AP questions often mix short-run macro conditions with long-run labor-market structure. If a recession raises unemployment, that usually means cyclical unemployment has increased. The natural rate has not necessarily changed. So the LRPC usually does not move.

By contrast, if a country develops a worse skill mismatch, weaker job-search systems, or more rigid labor markets, the natural rate may rise. Then the LRPC shifts right.

A useful AP-level link is **NAIRU**, the unemployment rate consistent with stable inflation. In introductory AP treatment, NAIRU and the natural rate are treated as nearly the same idea.

> **Key Term: NAIRU**
> The non-accelerating inflation rate of unemployment; in AP Macroeconomics it is treated as closely related to the natural rate of unemployment.

Why does a higher natural rate shift the LRPC right? Because the economy’s long-run unemployment is now higher at every possible inflation rate. Since the LRPC is vertical, the whole line moves to a larger unemployment value on the horizontal axis.

Why does a lower natural rate shift the LRPC left? Because long-run unemployment is now lower at every inflation rate.

A simple way to think about it:

- More structural or frictional unemployment = higher natural rate = LRPC right
- Less structural or frictional unemployment = lower natural rate = LRPC left

### What causes the LRPC to shift

The LRPC shifts only when something changes the structure of the labor market enough to change the natural rate.

Factors that can raise the natural rate and shift the LRPC right include:

- worse job matching between workers and firms
- greater skill mismatch
- lower geographic mobility
- labor-market rigidities that keep wages from adjusting
- policies that may increase structural unemployment in some labor markets

Be careful with examples like minimum wage laws and unions. On AP, the safe wording is that they can increase structural unemployment in some cases, especially if wages are kept above equilibrium for low-skill labor. Do not present them as automatic outcomes in every case.

Factors that can lower the natural rate and shift the LRPC left include:

- better education and training
- retraining for workers displaced by technology
- improved job information, such as efficient job-search platforms
- greater worker mobility
- more flexible labor markets

Now trace the logic carefully.

If retraining improves workers’ skills, then fewer workers remain unemployed because of mismatch. Structural unemployment falls. Since the natural rate equals frictional plus structural unemployment, the natural rate falls. Therefore, the LRPC shifts left.

If job-search technology helps people find jobs faster, frictional unemployment falls. The natural rate falls. Therefore, the LRPC shifts left.

If a major technological change leaves many workers without relevant skills and retraining is weak, structural unemployment rises. The natural rate rises. Therefore, the LRPC shifts right.

These chains of reasoning are what AP graders want. Do not stop at “training helps unemployment.” Show the mechanism.

> **Test Tip:** In written responses, use the full chain: “training reduces structural unemployment, which lowers the natural rate of unemployment, so the LRPC shifts left.” That earns clearer points than a short claim.

### SRPC movement, SRPC shift, and LRPC shift: the distinction students miss

This is the biggest trap in this topic. Students often know each idea separately but confuse them in questions.

Here is the clean distinction.

#### Movement along the SRPC

A movement along the short-run Phillips curve happens when aggregate demand changes and short-run aggregate supply is stable.

- AD increases: inflation rises, unemployment falls
- AD decreases: inflation falls, unemployment rises

That is movement on the same SRPC.

#### Shift of the SRPC

A shift of the SRPC happens when short-run conditions change, especially inflation expectations or short-run aggregate supply conditions.

For example, if inflation expectations rise after an expansionary policy, the SRPC shifts right. The economy returns to the natural rate of unemployment, but at a higher inflation rate.

This is the usual long-run adjustment story after a demand shock.

#### Shift of the LRPC

A shift of the LRPC happens only when the natural rate changes.

That means the cause must affect frictional or structural unemployment, not just cyclical unemployment or current inflation.

Here is a side-by-side comparison:

| Change                           | What happens?     | Why?                                                      |
| -------------------------------- | ----------------- | --------------------------------------------------------- |
| Increase in aggregate demand     | Move along SRPC   | Inflation rises, cyclical unemployment falls in short run |
| Change in inflation expectations | SRPC shifts       | Short-run inflation-unemployment relationship changes     |
| Better worker training           | LRPC shifts left  | Structural unemployment falls, natural rate falls         |
| Larger skill mismatch            | LRPC shifts right | Structural unemployment rises, natural rate rises         |

Worked AP-style examples help make this clearer.

Example 1: The Fed lowers interest rates during a recession.  
Short run: AD rises, unemployment falls, inflation rises. Move along SRPC.  
Long run: inflation expectations adjust, SRPC shifts.  
LRPC? No shift, unless the policy somehow changed the natural rate, which ordinary demand management does not.

Example 2: The government funds national retraining programs for workers displaced by automation.  
Short run effects may vary, but the key long-run effect is lower structural unemployment.  
Natural rate falls.  
LRPC shifts left.

Example 3: A recession causes unemployment to rise from 5% to 8%.  
That is mainly cyclical unemployment.  
Natural rate? Usually unchanged.  
LRPC? Usually unchanged.

This is why an AP prompt might ask whether the LRPC shifts “in the long run” after an inflationary or recessionary gap closes. The safe answer is usually no, unless the prompt gives a structural labor-market reason.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The LRPC is vertical at the natural rate of unemployment
- The long run has no permanent tradeoff between inflation and unemployment
- The natural rate of unemployment includes frictional and structural unemployment
- The natural rate does not include cyclical unemployment
- The LRPC shifts only when the natural rate of unemployment changes
- If the natural rate rises, the LRPC shifts right
- If the natural rate falls, the LRPC shifts left
- Aggregate demand changes move the economy along the SRPC, not the LRPC
- Long-run adjustment after a demand shock usually shifts the SRPC, not the LRPC
- Better training, improved job matching, and greater mobility can shift the LRPC left
- Skill mismatch, weak job matching, and labor-market rigidities can shift the LRPC right
- Inflation by itself does not shift the LRPC

## Key Terms and Concepts

- long-run Phillips curve (LRPC)
- natural rate of unemployment
- full employment
- frictional unemployment
- structural unemployment
- NAIRU


The Phillips Curve - Natural rate changes shift LRPC