Macro Foundations · intermediate
What moves on the Phillips Curve diagram
Improved matching efficiency reduces frictional and structural unemployment, shifting the long-run Phillips curve left. In the short run the economy moves along the unchanged SRPC, so unemployment falls and inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. temporarily rises; once expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. adjust the SRPC falls and inflation returns to target at the new lower natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle..
The vertical long-run curve is the natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle.: where unemployment settles once expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. have caught up.
Online matching platforms and better training cut the time it takes an unemployed worker to find a suitable job.
Frictional and structural unemployment fall, so the long-run anchor itself moves left.
Read the new crossing point carefully. Because the short-run curve has not moved yet, the economy slides DOWN it to lower unemployment and, for now, higher inflationinflationA sustained rise in the overall price level, eroding money's purchasing power..
That extra inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. is temporary. Once people see the central bank still hitting its target, expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. fall, the SRPC slides back down, and the economy settles at the new lower natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle. with inflation back where it started. Permanently lower unemployment, no permanent inflation cost.
Examiners ask this as: natural rate falls, NAIRU, job matching, seek, online job boards.
Other scenarios on Phillips Curve