Macro Foundations · intro
What moves on the Phillips Curve diagram
A cost-push shock raises expected inflationinflationA sustained rise in the overall price level, eroding money's purchasing power., shifting the short-run Phillips curve up so that any given unemployment rate is now paired with higher inflation.
Start on the short-run curve: today's tradeoff between unemployment and inflationinflationA sustained rise in the overall price level, eroding money's purchasing power..
Oil prices triple. Firms pass fuel costs into prices, and workers demand pay rises to keep up.
Expected inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. climbs, and the entire SRPC lifts: every unemployment rate now comes with more inflation than before.
That is stagflationstagflationThe ugly combination of falling output and rising prices, the signature of a negative supply shock.. The tradeoff did not move along the curve, the curve itself got worse.
Examiners ask this as: oil shock, stagflation, supply shock, petrol prices, cost push inflation.
Other scenarios on Phillips Curve